Current Account Covertibilty

8/3/2019 Current Account Covertibilty

1/11

FactsCurrent account convertibilityintroduced in India in August1994

Comply obligations underArticle VIII of the IMF sArticles of Agreement

This drastic measurecontributed significantly to

boost India s exports

Presently, there is almost fullconvertibility on the currentaccount


2/11

W hat is current account convertibilityConvertibility = converting onecurrency into anotherLike rupee to dollar, yen topound anything

Current account includes transactionson import and export goods orreceiving or making payments forservices renderedInvestments and borrowings arerestricted

Since money is incoming andoutgoing, people will need to convertthe money into different currenciesbased on their requirements


3/11

Cont

One has a big mobile store, import 5000 i-phonesa month from America, but the American supplieraccepts payment only in $. So one gets y rupee

converted into $ at forex market at anytime,nobody prevents from this

Again, some of those i-phones, one sells toBangladesh and Nepal, and gets their currency,and converts it into Rupees


4/11

Manifestation of full convertibilityOn trade account and onaccount of the receipt side of the invisibles, the rupee is fullyconvertible at marketdetermined exchange rates

The payment side of theinvisible and receipts andpayments of account aresubject to exchange control

Exchange rates for all thesepermissible transactions areundertaken at the free marketexchange rates


5/11

Allowed convertibility on transactions

It allows residents to makeand receive trade-relatedpayments

receives dollars (or any otherforeign currency) for export of

goods and services

pay dollars for import of goodsand services

make sundry remittances

access foreign currency fortravel, studies abroad, medicaltreatment and gifts etc


6/11

Authorized Dealers to Deal in

Foreign ExchangeSrNo

Catagory

Entities Major Activities

1 Ad- I Commercial BanksState Co -op BanksUrban Co -op Banks

A ll current an d capital account transactionsaccor d ing to RB I d irections issue d from time -to - time.

2 AD-II Upgra d ed FFMCsCo -op. BanksRegional Rural Banks (RRBs)Others

Specifie d non - tra d e relate d current accounttransactions an d also all the activities

permitte d to Full Fle d ged Money Changers.A ny other activity as d eci d ed by the ReserveBank.

3 AD-III Select Financial an d other Institutions

Transactions inci d ental to the foreignexchange activities un d ertaken by theseinstitutions.

4 FFMC D ept. of PostsUrban Co -op. BanksOther FFMC

Purchase of foreign exchange an d sale for private an d business visits abroa d .


7/11

Criteria for Granting LicensesEligibility Criteria for grant of AD Category II licence

The eligibility criteria primarily depend on strong financials, good governance, regulatory / prudentialcomfort and adequate internal control mechanism

Existing Full-fledged Money Changers (FFMCs)

Reserve Bank will consider granting AD-Category II licence to the existing, well functioning FFMCs, withstrong financials, that demonstrate good governance while providing regulatory / prudential comfort.The criteria for up-gradation of existing FFMCs to AD-Category II include minimum net owned funds of

Rs. 10 croressatisfactory functioning as FFMC for at least two years and satisfactory credit report from their bankers


8/11

ContU rban Co-operative Banks ( U CBs)

U rban Co-operative Banks with strong financials, good governance and providing regulatory /prudential comfort will be considered, on case by case basis, for licensing as AD-Category II

R egional R ural Banks ( RR Bs)

In view of the wide branch network of RRBs and with a view to providing foreign exchange servicesat the doorstep of the common person, RRBs with strong financials, good governance and providingregulatory/supervisory comfort and having requisite skills and capabilities will be considered forgranting licences as AD-Category II


9/11

ContO pening of Foreign Currency Accounts (Nostro) abroad

The entities proposed to be licensed as AD-Category II are being permitted to undertake thetransactions that involve conversion of one currency into anotherSuch transactions may not necessarily require opening and maintaining foreign currency

denominated (NOSTRO) account with a bank outside IndiaHowever, to facilitate issuance of foreign currency draft, etc. for such transactions, the AD-CategoryII may enter into arrangements with banks authorised to deal in foreign exchange in India.

R eportingThe ADs-Category II are required to submit the following monthly statements of transactions:

A. Category-wise statement of transactions where the amount exceeds U SD 5,000 per transactioninitially, so that a review could be made of the threshold in six months and a firmer threshold may bearrived at

B. Category-wise, transaction-wise statement where the amount exceeds U S $ 25,000 pertransaction.


10/11

ContdInspection / Audit

For ADs-Category II, an auditor s certificate confirming compliance with the Rules / Regulations /Directions will be adequateReserve Bank reserves the right to inspect them when considered necessary

Reserve Bank may also require a special audit of the ADs-Category II, depending on the nature of thetransactions, by an auditor from the approved list of the Reserve Bank/ Institute of Chartered Accountants of India

Anti-Money Laundering / Know Your Customer (KYC) NormsKYC and Anti-Money Laundering norms prescribed for FFMCs will be applicable toADs-Category II also


11/11

Reference

http://mrunal-exam.blogspot.com/2011/03/economy-q-capital-and-current-account.htmlhttp://kannanpersonal.com/learning/forex-market/basics2.html

Documents

Current Account Covertibilty