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Currency Convertibility : Indian and Global Experiences
By Sumati Varma

First Published : 2007
ISBN : 8177081381
: 9788177081381
Pages : 276
Binding : Hardbound
Size : 5 x 9
Price : US$ 38

Currency convertibility, as an aspect of a country’s exchange rate policy, refers to the ease with which domestic currency can be traded for foreign currency, for a particular usage and at a given exchange rate.    

Currency convertibility policy of a government has two aspects: (a) current account convertibility and (b) capital account convertibility. Current account convertibility allows residents to make and receive trade-related payments, i.e. receive foreign currency for export of goods and services and pay foreign currency for import of goods and services like travels, medical treatment and studies abroad. In other words, it permits free inflows and outflows for all purposes other than for capital purposes.

Capital account convertibility allows freedom to make investment in foreign equity, extend loans to foreigners, buy real estate in foreign lands and vice versa. Broadly speaking, it allows anyone to move freely from local currency into foreign currency and back.

Current account convertibility was introduced in India in August 1994 with the acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement. This drastic measure contributed significantly to boost India’s exports. Presently, there is almost full convertibility on the current account and partial convertibility on the capital account.

This book explains and examines various aspects of currency convertibility risks and their management. With focus on India, it discusses convertibility experiences of a number of Latin American countries (Argentina, Brazil, Mexico, Chile, Colombia, Peru, Paraguay, Venezuela, Bolivia, and Ecuador) and selected countries of East and South-East Asia (Thailand, South Korea, Indonesia, Malaysia, and Philippines). The experiences of these countries, in a comparative perspective, will help to understand the requisites of a regime of sustainable convertibility.    

1. Introduction
1.1 Currency Convertibility: Meaning and Importance
1.2 Currency Convertibility and Economic Growth
1.3 Currency Convertibility: The Global Experience
1.4 Recent History of Capital Flows
1.5 Convertibility, Crisis and Contagion

2. Currency Convertibility: IMF and World Bank Policies
2.1 Introduction
2.2 Logic of Convertibility
2.3 Evolution of Convertibility
2.4 Convertibility as IMF Conditionality
2.5 An Overview of IMF/World Bank Policy Prescriptions
2.6 Financial Programming Model
2.7 Current Account Convertibility
2.8 Exchange Restriction vs. Exchange Control
2.9 Trade Restriction vs. Exchange Restriction
2.10 Capital Account Convertibility
2.11 Convertibility and the Choice of Exchange Rate Regime
2.11.1 Arguments in Favour of Fixed Exchange Rates
2.11.2 Case for Floating Exchange Rate
3. Capital Account Convertibility: Different Perspectives
3.1 Introduction
3.2 Dynamics of Global Capital Flows
3.3 Capital Flows to the Developing World
3.3.1 Nature of Capital Flows
3.4 Determinants of Capital Flows
3.5 Pros and Cons of Capital Mobility
3.5.1 Arguments for Capital Mobility
3.5.2 Arguments against Capital Mobility
3.5.3 True Extent of Capital Mobility
3.6 Capital Controls
3.6.1 Rationale for Capital Control
3.6.2 Types of Capital Control
3.6.3 Controls on Capital Outflows
3.6.4 Controls on Capital Inflows
3.6.5 Cost of Maintaining Capital Controls
3.7 Capital Account Liberalisation and Growth
3.8 The Impossible Triad
3.9 Conclusion
4. Currency Convertibility: The Indian Experience
4.1 Introduction
4.2 Control Regime in India: A Background
4.3 Liberalized Exchange Rate Management System (LERMS)
4.3.1 Main Recommendations of Rangarajan Committee
4.4 Unification of the Exchange Rate
4.5 Current Account Convertibility and Dollarisation
4.6 Capital Account Convertibility: Policy Guidelines
4.6.1 Second Tarapore Committee on Capital Account Convertibility, 2006
4.7 Trends and Composition of Capital Flows into India
4.8 Foreign Direct Investment in India
4.9 Indian Foreign Direct Investment
4.10 Portfolio Investments
4.11 Exchange Rate Behaviour and Management
4.12 Foreign Exchange Reserves
4.12.1 Adequacy of Reserves
4.13 Money Supply and Sterilisation
4.14 Conclusion
5. Latin America: Openness and Crash
5.1 Introduction
5.1.1 The Turbulent 1980s
5.1.2 Recovery and Reforms
5.1.3 Financial Liberalisation: Pace and Sequencing
5.1.4 The Impact of Financial Liberalisation
5.2 Financial Development and Growth
5.2.1 Efficiency and Allocation of Investment
5.2.2 Financial Deepening
5.2.3 Saving and Consumption
5.2.4 Financial Crisis
5.3 Argentina
5.3.1 Debt, Overvaluation and Decline: 1976-1981
5.3.2 The Period 1981-83
5.3.3 The Period 1984-1989
5.3.4 A Decade of Growth
5.3.5 The Convertibility Plan
5.3.6 Collapse of the Hard Peg
5.4 Brazil
5.4.1 Stabilisation Experience
5.4.2 Real Plan 1994
5.4.3 Capital Flows: Maintaining Credibility as Fundamentals Deteriorate
5.4.4 The Collapse of 1999
5.5 Mexico
5.5.1 The Crisis of 1982
5.5.2 Mexico had a Convertible Currency
5.5.3 The Crisis of 1994-95
5.5.4 Achieving a Smooth Transition
5.6 Chile
5.6.1 Introduction of Reform: 1978-82
5.6.2 Capital Controls
5.6.3 Growth and Stability
5.7 Colombia
5.7.1 Introduction
5.7.2 Control over Capital Inflows
5.7.3 Impact of Capital Account Liberalisation
5.8 Peru
5.8.1 Reforms of 1990
5.8.2 Impact of Capital Account Liberalization
5.9 Paraguay
5.9.1 Macro-economic Background
5.9.2 Banking Sector Development
5.10 Venezuela
5.10.1 Macro-economic Background
5.10.2 Banking Sector Crisis
5.10.3 Exchange Controls
5.11 Bolivia
5.11.1 Early Macro-economic Stabilization
5.11.2 Recent Economic Performance
5.11.3 Meeting the Challenges Ahead
5.12 Ecuador
5.12.1 Introduction
5.12.2 Macro-economic Adjustment
5.12.3 Dollarization and Semi-Dollarization
5.13 Conclusion
6. Saga of Asian Tigers
6.1 Introduction
6.2 Miracle Growth Economies
6.3 Crisis and Meltdown
6.4 Main Features of the Asian Crisis
6.4.1 Volatility of Funds
6.4.2 An Unpredicted Crisis
6.4.3 Some Signs of Growing Risk
6.4.4 Growing Current Account Deficit
6.4.5 Investment Rates
6.4.6 Private and Public Savings
6.4.7 Inflation
6.4.8 Overvalued Exchange Rate
6.4.9 Slowdown in Export Growth
6.4.10 Rapid Expansion of Commercial Bank Credit
6.4.11 Increase in Short Term Debt
6.5 Thailand
6.5.1 Growth of External Debt
6.5.2 Weaknesses in the Financial Sector
6.5.3 Stock Market Decline
6.5.4 Speculative Attacks and Currency Depreciation
6.6 South Korea
6.6.1 Problems in the External Sector
6.6.2 Strong Fundamentals
6.6.3 Weaknesses and Problem Areas
6.6.4 The Crisis
6.7 Indonesia
6.7.1 Sustained Growth
6.7.2 Private Sector Debt
6.7.3 The Currency Crisis
6.7.4 The Financial Crisis
6.7.5 Loss of Credibility
6.8 Malaysia
6.8.1 Financial Reform and Liberalization
6.8.2 Experience with Capital Controls
6.8.3 September 1998 Exchange and Capital
Control Measures
6.8.4 Exit Levy System: February 1999
6.8.5 Impact of Controls
6.9 Philippines
6.9.1 Macro-economic Background
6.9.2 Banking and Financial Sector Reform
6.9.3 Global Turmoil and Contagion
6.10 Conclusion
7. Managing Convertibility
7.1 Managing Convertibility
7.1.1 Pace and Sequencing of Reform
7.1.2 Adopting a Hierarchical Approach to Capital Flows
7.1.3 Liberalise Banks First, Followed by Stock and Bond Markets and Offshore Borrowing
7.1.4 Capital Account Openness: Growth vs. Crisis
7.1.5 Indirect Benefits of Financial Integration
7.1.6 Identifying Thresholds for Growth
7.1.7 Capital Controls
7.2 Indian Experience with Convertibility
7.3 Conclusion

Appendix: Reserve Bank of India, Report on Foreign Exchange Reserves, January 2007




Dr. Sumati Varma is a Reader in the Department of Commerce at Sri Aurobindo College (Evening), University of Delhi. She did her graduation from Jesus and Mary College, post- graduation from Hansraj College and M.Phil. and Ph.D. from the Department of Commerce, Delhi School of Economics, University of Delhi.

She is associated with the teaching of Master of International Business course conducted by the Department of Commerce,  University of Delhi and the external students programme of the London School of Economics and Political Science, London University. She has also rendered her services as visiting faculty at the Amity Business School, Manesar.

As a consultant to NCERT, she has co-authored the text book on Business Studies for class XII published by it. Her teaching and research interests include international business and finance, managerial economics and corporate laws.

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