Full Convertibility of Rupee

Before knowing about “full convertibility of rupee”, one should know first “what is convertibility of currency?” Currency convertibility means “the freedom to convert one currency into other internationally accepted currencies. Full convertibility of rupees means unified market determined exchange rate regime, converting rupees in to foreign currencies on both sides i.e. from “current account” and from “capital account” side.

From current account side means, wherein the exporters and importers were allowed a free conversion of rupee. But still none was allowed to purchase any assets abroad.

From capital account side means, that rupee can now be freely convertible into any foreign currencies for acquisition of assets like shares, properties and assets abroad. Further, the banks can accept deposits in any currency. For example, if a foreigner buys a building in India, and after 5 yrs its selling price rises so sells it at five times the cost he collected, now he has rupees in hand, can he easily convert these rupees into say ‘US$’ easily? Considering that exchange rate is better in terms of INR-US$, the foreigner would want to convert the currency into US$ and this can be done if complete capital a/c convertibility takes place. Remittance to foreign countries from India is restricted by RBI. For import of machines you are remitting abroad means it is capital account convertibility. If you remit money to your son or relative living abroad means current account convertibility.

The Government when introduced the Partial convertibility of Rupee in 1992. The full convertibility means unified market determined exchange rate regime. Encouraged with the success of the LERMS (Liberalized Exchange Rate Management System), the government introduced the full convertibility of Rupee in Trade account from March 1993 onwards. With this the dual exchange rate system was abolished and LERMS was now based upon the open market exchange. The full convertibility of Rupee was followed by stability in the Rupee Rate in the next many months coming up. The above full convertibility was introduced on Trade account. The Government wanted to introduce the Full convertibility of Rupee on Current account (means invisible i.e. services also included). In August 1994, the Government of India declared full convertibility of Rupee on Current account with announcing some relaxations as per requirements of the Article VIII of the IMF. These were: Repatriation of the income earned by the NRIs and overseas corporate bodies of NRIs in a Phased manner in 3 years period. The ceiling for providing foreign exchange for foreign tours, education, medical treatment, gifts and services was made just an indicative. Above this ceiling, foreign exchange could be obtained for payments, while making a reference to RBI. While the Principal amount on the NRNR (Non Resident Non Repatriable) Accounts was non repatriable, the interest was made repatriable.

There are two types of NRI( Non Resident Indian ) accounts, namely non-repatriable accounts and repatriation accounts.

1.   Repatriable Accounts : Legally Indian rupees can be transferred back to foreign currency, that is money can be converted to any foreign currency.

2.   Non-Repatriable Accounts : Money cannot be converted to any foreign currency.

Here are the list of repatriable and non-repatriable accounts

Repatriable Accounts:

§  NRE Account ( Non-resident External Account ) – : Savings, Current & Time Deposits

§  FCNR-B Account ( Foreign Currency Non-resident Bank Deposits)

§  Non-Repatriable Accounts:

§  NRO Account ( Non-resident Ordinary Rupee Account ) – Savings, Current and Time Deposits

§  NRNR Accounts ( Non-resident Non-Repatriable Term Deposits Accounts)

§  NRSR Account (Non-residents Special Rupee Account)

Note: With effect from 01/04/2002, both NRSR and NRNR deposit schemes have been discontinued by RESERVE BANK OF INDIA.