presentation

1. International Finance

2. Currency and
Convertibility

3. The FOREX MarketThe FOREX Market
 The FOREX market is where currencies are traded
 The market incorporates all arrangements used to buy and sell foreign
exchange (not a physical place but a network of telephones, emails
and faxes connecting all the large banks in the world).
 Volumes traded daily are huge: $3 trillion per day
 Most transactions involve exchange of $US for other currencies. In
large transactions, traders exchange one currency for $US and then
buy another currency with the dollar. The $US is thus called a
vehicle currency.

4. Currency ConvertibilityCurrency Convertibility
What it is ?
Convertibility essentially means the ability of residents and non-residents to
exchange domestic currency for foreign currency, without limit, whatever be
the purpose of the transactions.
Types Of Currency Convertibility.
1.Fully convertible currency.
2.Partially convertible currency.
3.Non-convertible currency.

5. Non convertible CurrencyNon convertible Currency
Also known as a "blocked currency".
Any currency that is used primarily for domestic transactions and
is not openly traded on a forex market. This usually is a result of
government restrictions, which prevent it from being exchanged
for foreign currencies

6. Types of convertibilityTypes of convertibility
1. Current Account
2. Capital Account

8. Current AccountCurrent Account
Transactions relating to:
- Exchange of goods and services
- Money transfers
- Transactions that are classified in the Current Accounts.
In Short, Current account includes all transactions, which give
rise to or use of our National Income.

9. Current Account TransactionsCurrent Account Transactions
• All imports and exports of merchandise.
• Invisible Exports and Imports (sale/purchase of services)
• Inward private remittances (to & fro)
• Pension payments (to & fro)
• Government Grants (both ways)

10. Current Account ConvertibilityCurrent Account Convertibility
 Indian scenario - fully convertible.
 Full freedom to both residents and non-residents.
 RBI has placed a cap in creation of a capital asset
 Freedom in respect of payments and transfers for current
international transactions.

11. Capital accountCapital account
• Inflows and Outflows of capital.
• Borrowing from or Lending to aboard.
• Sales and Purchase of securities aboard.

12. Capital Account TransactionsCapital Account Transactions
 Capital Direct Foreign Investments.
 Investment in securities.
 Other Investments.
 Government Loans.
 Short-term investments.

13. Capital Account Transaction’s Classification
Portfolio
Investment .
 Stocks,
 Bonds,
 Bank
 Loans,
 Derivatives.
Direct
Investment.
Real estate
Production
facilities
Equity
investment.
Other investment.
Holdings in
loans
 Bank accounts
Currencies

14. Capital Account ConvertibilityCapital Account Convertibility
Capital account convertibility (CAC) refers to the freedom of
converting local financial assets into foreign financial assets and
vice versa at market determined rates of exchange. It refers to
the elimination of restraints on international flows on a
country’s capital account, facilitating full currency convertibility
and opening of the financial system.

15. Benefits of capital account convertibilityBenefits of capital account convertibility
to India:to India:
The Tarapore Committee mentioned the following benefits of capital account
convertibility to India:
1. Availability of large funds to supplement domestic resources and thereby promote
economic growth.
2. Improved access to international financial markets and reduction in cost of
capital.
3. Incentive for Indians to acquire and hold international securities and assets, and
4. Improvement of the financial system in the context of global competition.
5. Freedom to convert local financial assets into foreign ones at market-determined
exchange rates
6. Leads to free exchange of currency at lower rates and an unrestricted mobility of
capital

16. Currently Restrictions : Capital AccountCurrently Restrictions : Capital Account
 Limits to companies borrowing abroad.
 Restriction on foreigner investing in India.
 Restriction on amount that FII can hold.
 Purchasing a company is allowed but limit exit on the
amount that can be send.
 Global Diversification of household portfolio is practically
non-existent.

17. RUPEE CONVERTIBILITYRUPEE CONVERTIBILITY

18. IntroductionIntroduction
• The Indian rupee(Devanagari: रपया)) is the official currency of “The
republic of India”.
• Today, the currency is available in the form of “Bank notes” and “coins
of the rupee”.

19. Convertibility of RupeeConvertibility of Rupee
Convertibility of a currency implies that a currency can be
transferred into another currency without any limitations or any
control. A currency is said to be fully convertible, if it can be
converted into some other currency at the market price of that
currency. Convertibility can be related as the extent to which a
country's regulations allow free flow of money into and outside the
country.
Convertibility of rupees is known as freedom of exchange of rupee
with other all international currency

20. History of Rupee ConvertibilityHistory of Rupee Convertibility
 Upto 1991, there was rigid control on both Capital and Current
account.
 After start of liberalization in1991, India had accepted the IMF
rules for currency reforms.
 Capital account convertibility was introduced in India in August
1994.
 In 1997 the government had set up a committee (Tarapore
committee) to spell out a road map for the full convertibility of
the rupee.

21. Tarapore CommitteeTarapore Committee

22. Tarapore CommitteeTarapore Committee
 Committee on capital account credibility, set up by
RBI(Reserve Bank of India) under the chairmanship of former
RBI deputy governor S.S. Tarapore.
 The report submitted by this Committee in the year 1997
proposed a three-year time period (1999-2000) for total
conversion of Rupee

23. The committee was formed
on 28 February 1997. The
members were:
S. S. Tarapore, Chairman
Surjit S. Bhalla
M. G. Bhide
Kirit Parikh
A. V. Rajwade

24. Tarapore CommitteeTarapore Committee
Reasons for the introduction of CAC in India:
It was meant to ensure total financial mobility in the country
It also aimed in the efficient appropriation or distribution of international capital
in India
Pre - conditions:
The fiscal deficit needs to be reduced to 3.5% of the GDP
Inflation rates need to be controlled between 3-5%
Non-performing assets (NPAs) need to be brought down to 5%
Cash Reserve Ratio (CRR) needs to be reduced to 3%
A monetary exchange rate band of plus minus 5% should be instituted

25. The Second Tarapore Committee on CapitalThe Second Tarapore Committee on Capital
Account ConvertibilityAccount Convertibility
 Reserve Bank of India appointed the second Tarapore committee to set out the
framework for fuller Capital Account Convertibility.
 The committee was established to revisit the subject of fuller capital account
convertibility in the context of the progress in economic reforms, the stability of
the external and financial sectors, accelerated growth and global integration.
 The report of this committee was made public by RBI on 1st September 2006. In
this report, the committee suggested 3 phases of adopting the full convertibility
of rupee in capital account.
 First Phase in 2006-7
 Second phase in 2007-09
 Third Phase by 2011.

26. RecommendationsRecommendations
Following were some important recommendations of this committee:
The ceiling for External Commercial Borrowings (ECB) should be raised for
automatic approval.
NRI should be allowed to invest in capital markets and NRI deposits should be
given tax benefits.
Improvement of the Banking regulation.
FII (Foreign Institutional Investors) should be prohibited from investing fresh
money raised to participatory notes.
Existing PN holders should be given an exit route to phase out completely the PN
notes.
At present the rupee is fully convertible on the current account, but only partially
convertible on the capital account.

27. CAC Benefits to INDIA

28. PROGRESS AT COUNTRY LEVEL
1. End of Balance of Payment (BoP) crisis:
In 1991 India was struggling with the crisis in its balance
of payments. Importing was essential for the country while
the governments conservative approach towards exports
pushed country into severe balance of payment deficit.
Capital account liberalisation has been the strongest
medium in curbing such crisis

30. (2) Plenty of Foreign Currency Reserves:
India has envisaged a plentiful surge in its reserves. The
liberalisation of capital account has helped country in
recovering from reserve shortage. The doting supply of
dollars to Reserve Bank exchequer is a healthy sign for
economy, as reserves can be utilised during the times of
adversity.

31. (3) Efficiency in Financial System:
Capital Account Convertibility is incomplete without fiscal
consolidation, sound policies and financial prudence. RBI and
Government of India have been very conservative and watchful
during whole process of liberalisation. This has improved total
financial performance of economy.
Banks today have greater access to additional capital (foreign
borrowing), autonomy in operations (easening of control by RBI)
and intensive competition (opening of private and foreign banks
and Non Banking Finance Corporations).

32. (4) Development of Securities Market:
Gush of Foreign Institutional Investment (FII) has helped
in multifold enlargement of security market. The market
capitalisation of BSE and NSE has significantly risen.
Derivates, bonds, commodities now constitute the major
trading instruments besides equity shares. Sensex (above
24,000) and Nifty (above 7,000) touched new heights due
to huge investment in the listed stocks.

33. (5) Worldwide Presence and Friendly Relations with
Trading Counterparts
Flow of investment is a distinctive medium of developing
global relationships. Indian MNCs and service
organisations are conducting business operations in almost
140 countries across the globe.
India is 19th largest exporting country in the world
according to 2011 estimates. Indian IT services,
handicrafts, cuisine and jewellery are world famous and
contribute to major chunk of revenue from international
operations. It all has become reality with the financial
liberalisation

34. PROGRESS AT CORPORATE LEVEL
1) Indian corporate sector is inundated with broader access to low cost capital
through External Commercial Borrowings. In addition, companies have
the prospect of expanding their capital base through issue of American
Depository Receipts, Global Depository Receipts and corporate bonds.
2) Diversification of risk and economies of scale through business
performance in different realms.
3) Increase in profit after tax through intercontinental operations
(manufacturing, sales, services and Intellectual Property Rights).
4) Gains in technology through joint ventures, international license and
import of technology from the specialised manufacturer.
5) Access to worldwide pool of intellectuals, managers, technical personnel
etc and their specialised knowledge and skills

35. SECTORS WITH 74% FDI LIMITS ARE —
1. Airports
2. Broadcasting
3. Coal and lignite
4. Credit information companies
5. Direct to home (dth)
6. Mining ( diamonds & precious stones)
7. Satellites
8. Private sector banking

36. sectors with 100% fdi limits are —
1. Advertising
2. Agriculture
3. Air transport services (domestic airlines)— 100 % for nris
49% for others
4. Courier services
5. Drugs and pharmaceuticals
6. Electricity
7. Power
8. Films and studios
9. Hotel and tourism
10. Housing and real estate

37. 11. Construction
12. Mass rapid transport system
13. Minig(minig of gold and silver)
14. Nbfc
15. Oil exploration
16. Petroleum product marketing
17. Petroleum product pipelines
18. Petroleum refining(private sector)
19. Pollution control
20. Road,highways,ports and harbours

38. 21. Tourism
22. Tranportation infrastructure
23. Townships
24. Special economic zone(sez)
25. Railways
26. Single brand retail (upto 49% automatic 49-100% by fipb)
27. Telecommunications (upto 49% automatic 49-100% by fipb)
28. Asset reconstruction companies ( upto 49% automatic 49-100% by fipb)

39. sectors with 49% fdi limits are —
1. Airlines/aviation
2. Defence
3. Insurance
4. Pension

40. sectors with 26% fdi limits are —
1. Print media ( newspaper – 26%
scientific & periodicals – 100% )
2. Fm radio

41. sectors with 20% fdi limits is —
1. Public sector banks

42. ““give a man a fish andgive a man a fish and
you feed him for a day;you feed him for a day;
teach a man to fish andteach a man to fish and
you feed him for ayou feed him for a
lifetime”lifetime”