It is the freedom to convert local financial assets into foreign financial assets and vice versa at

market determined exchange rates.

This means that capital account convertibility allows anyone to freely move from local currency
into foreign currency and back.

Presently India has current account convertibility. This means one can import and export goods
or receive or make payments for services rendered. However investments and borrowings are
restricted.

Capital account convertibility may help NRIs as it will help remove all shackles on movement of
their funds. Currently, NRIs have to produce a whole lot of documents and certificates if they
want to buy a house in India (for which the lock-in period is 10 years, meaning they can't take
their money back overseas if they sell the house after having owned it for less than 10 years), or
send money to India from their overseas accounts.

Pros of CAC
Helps attract foreign investment and offers foreign investors a lot of comfort as they can re-
convert local currency into foreign currency any time they want to and take their money away.
Makes it easier for domestic companies to tap foreign markets.
Moreover, countries gain access to newer technologies which translate into further development
and higher growth rates.
Cons of CAC

It can actually destabilize the economy through massive capital flight from a country if the things
are unfavorable. For example, an Indian can sell the property here and take the capital outside.
It is believed that CAC increases short term FII's more than long term FDI thus leading to
volatility in the system.
Excessive capital inflow can cause currency appreciation and worsening of balance of trade
Furthermore there are overseas credit risks

However, if we were to judge the implications of CAC in India, independent of its general pros
and cons, CAC may not be such a good idea in the near future. The instability in the international
markets due to the sub prime crisis and fears of a US recession are adversely affecting the entire
world, including India.

Not only is there instability in the international arena, but India’s domestic economy is also
going through ups and downs. The rising prices and the appreciation of the rupee are adversely
affecting India’s exports and the Balance of Trade.
Also, corruption, bureaucracy and in general, a poor business environment, are discouraging the
inflow of investment. Poor infrastructure and socio-economic backwardness act as deterrents to
FDI inflow.

Hence, India still needs to work on its fundamentals of providing universal quality education and
health services and empowerment of marginalized groups, etc.

Hence, India should either wait for a while or implement CAC in a phased, gradual and cautious
manner.