Hello friend,
Thanks for your answer. I appreciate the response you have given to my article.
But i would like to specify one thing in front of you that i do not oppose the FCAC implementation. You have opened almost the new dimension for the discussion. I was concerned only with one thing that is whether India is ready for the FCAC or not?
I did say that the things are not right of the FCAC implementation at this juncture.

I completely object against your argument that implementation of FCAC is like GIVE ALL AND TAKE NOTHING STORY.

If you see the world currency history then you will come to know that FCAC implementation always does not turn out to be the bad thing at all!!
If you go through the implementation of the CAC worldwide then you will definitely come to know these things.
My one the greatest argument is that if it is implemented in to India right now then there will huge inflow of capital. Already we have faced inflation later we faced appreciation, but the same is not true with our competing country like China, Pakistan, Bangladesh, Thailand, Indonesia etc. So our export competitiveness is on the verge of loss against our near immediate competitors.

Future accumulation of the capital will not spell the doom in case of China because it is having ability to sustain the capital flows almost ten times that of ours. Chinese politicians would not allow to Yuan disproportionately. This you have seen in the recent months. Despite accumulation of the record capital flows of about $45 billion US dollar Chinese currency did not move significantly in contrast of the INR. So in this way whatever the policy that China followed this affects India too. We also have to follow the same path that China following because we are competing in almost same product categories worldwide.

I would like to mention some example where implementation of FCAC was beneficial.

First we will take example of JAPAN:

Almost in the 1987, the all mighty countries like US, UK, Germany and Japan went for the Plaza Accord to clear the world imbalance the way they are now. At that time due to pressure from all these developed country JAPAN went for the implementation of the FCAC. Then it created appreciation of the Yen from almost 430 to 110 per USD. No doubt this has brought JAPAN to standstill but the same time the prosperity it has brought to JAPAN you cannot ignore. This type of appreciation itself meant the JAPAN has become richer by almost four times as compared to Americans. It spurred the rapid rise in the productivity growth of the JAPNANES economy. Still Japan never lost competitiveness against other countries because there were no significant competing countries against JAPAN at that time. So JAPAN climbed the technology ladder and braced up the prosperity and this helped to boost the consumption in the Japanese economy. The same is true with South Korea, Australia, and New Zealand

So these are some latest examples of the countries that benefited from implementation of CAC.

If you take Australia, the country, which has implemented the CAC in almost way back in 1983, has suffered the chronic current account deficits. It has the net international investment position is almost negative by about 63 percent of its GDP. It is on such shaky fundamentals!!

Still this country is able to attract the capital from different countries and could maintain the stability of their currency. This is due to the various maneuvers that their government has undertaken to attract the capital flows by various means. That you can go through their history. But definitely one thing is there it has brought significant prosperity to Australian economy and so to US, UK and other developed countries.

So one contrast thing is that Australian Economy is smaller one as compared to others.

In our case the main competing country that is China is not going for appreciation of its currency Yuan despite the underlying fundamentals strongly suggest the case. It is unable to create huge consumption base. It went for saving that is the main cause of the trade surplus means it went for investment rather than consumption. Now Chinese politicians are confused in this situation. They are on the verge of the strange situation on one side their rising unemployment and slowing investment growth and other side rapidly rising foreign exchange reserves. They started curbing the investment growth in their economy and trying to create the consumption base. If China goes for appreciation then only India can brace up the FCAC because the main opposing point gets erased against its implementation that is currency appreciation!!!

Is India reay for fuller capital account convertibility?

Capital account convertibility is usually considered as the hallmark of the developed country. Monitory authorities of every country in the world like to go for the CAC ultimately in their course of development. There are lot of hurdles in this path as it is has become evident from the 1997 Asian currency meltdown.

Capital account convertibility is the most complex financial entity to discuss. It is not having any precise definition. Broadly it is defined as the freedom given to the citizen to convert local assets in to the foreign assets and freedom given to the global citizen to buy any class of assets such as stocks, bonds, real estate etc.

CAC itself is a vogue term. It has so many levels of implementations. It not a single event but it is the long drawn process so that the monitory authorities give the gradual relaxation of the limits that they have imposed on the capital flows. For example limit on the outward remittances for the domestic citizen is raised for so many times in recent years. It is now up to one tenth of millions of US dollars per person per year. RBI has taken this step to boost the outward flow of capital. RBI has also lifted almost all restriction on the companies for acquisitions abroad. So that it will spur the outward capital flows.

So many countries have previously tried to go for the capital account convertibility. Every nation, which went for the CAC has the varied results. For some it has been the beneficial to their economy and for some it has turned in to the disaster.

India tried for the fuller CAC for two times. Indian government has constituted two committees both under the leadership of S.S. Tarapore. One in 1997 and other in 2006.

The first time the plans got spooked due to the great south and East Asian currency meltdown. After this crisis government disbanded the idea implementing CAC at that time.

Now government is reviving the idea of the fuller capital account convertibility as it want to make India the financial powerhouse, as the situation is ripe now. So the committee is constituted under S.S. Tarapore, which has given recommendation for the fuller CAC.

So main point for discussion is whether India is ready for the Fuller Capital Account Convertibility?

So my answer is our nation is not ready for the Fuller Capital Account Convertibility.

So I would like to explain my argument in the following way:

So many politicians have raised the concern against the capital outflow and massive currency depreciation.

On the contrary the real problem in implementation of FCAC lies in the massive capital inflow. It is evident from the rapid accumulation of the capital in recent years. It is leading in to rapid rise in the money supply. Due to this India has faced rapid rise in the inflation rate, rising asset prices etc. So it is now leading in to the overheating of the Indian economy.

The most important point is that India still has not yet braced up the idea of fuller capital account convertibility.

There is cap in the external commercial borrowing, cap on the overseas investment in the bond market, etc. Still there is significant restriction on the inflow of capital in India.

The accumulation of the foreign exchange reserves in the last one-year is about 40 billion USD due to large-scale intervention of RBI to prevent rapid appreciation of our domestic currency.

Due to the RBI felt the heat of inflation which arose due to rising money supply growth up to almost 20% Y-o-Y. So recently RBI went for non-intervention in the forex markets due to this value of our domestic currency increased against the dollar about 12 % Y-o-Y.

Now i would like to give one proof to support my argument that RBI is not going to raise the cap on the ECB or any other kind of the overseas borrowing and the contrary it want to restrict the current flows to prevent economy from overheating. So the exact paradoxical thing RBI is doing as compared to the recommendations that S.S. Tarapore Committee has given on for achieving the Fuller Capital Account Convertibility. This act of RBI is the exact role reversal even though they are doing it according to the prevalent situation.

And the global scenario is also adverse for implementation of FCAC. US economy is coping with twin deficits that is fiscal and current account deficit which is running at the level of 800 US billion dollars a year since last few years. The net international investment position is negative by about 2.8 trillion US dollars almost equal to the foreign exchange reserves accumulated by Asian countries. This is the situation when the US economy is its peak of their interest rate cycle. Now US is on the verge of recession as already it is facing slowdown due to rapidly plunging housing market. Even when the interest rates are at the there peak then also dollar has already hit multiyear low against pound and other major currencies in the world and all time low against Euro. If US fed starts lowering the interest rates to keep away its economy from recession then the great slide of US dollar will happen against almost all currencies in the world.

In such situation the investor will always try to escape from dollar denominated assets. They will always find safe heaven in the emerging markets. These markets have to sustain the huge capital flows so to India.

Already with this small amount of capital flow has created lot of inflation and almost 12% appreciation of the Rupee. It is almost impossible for our economy to sustain the rising capital flows without causing any damage to its economy.

We already have lost the competitiveness in the export market viz other developing countries like China etc as we are coping with the appreciation of Rupee, but other competing Asian countries have not faced such kind of appreciation in their currency. It will further slow our exports and our imports will rise, as imported goods will become cheaper. It will further aggravate our grave situation on current account deficit front. This all leads to volatile currency. Such volatility will deter the long-term investors away from the Indian markets. It will lead to the loss of confidence of the foreign investors about the fundamentals of the Indian economy.

My opinion is the current situation is not appropriate for going Fuller Capital Account Convertibility.

So comments, suggestions, questions, and counter arguments on this article are welcome. I request you to make this topic widely discussed on all fronts.

Bye bye

Dr. Gullapalli H.S.

Is India is ready for fuller capital account convertibility?

Capital account convertibility is usually considered as the hallmark of the developed country. Monitory authorities of every country in the world like to go for the CAC ultimately in their course of development. There are lot of hurdles in this path as it is has become evident from the 1997 Asian currency meltdown.

Capital account convertibility is the most complex financial entity to discuss. It is not having any precise definition. Broadly it is defined as the freedom given to the citizen to convert local assets in to the foreign assets and freedom given to the global citizen to buy any class of assets such as stocks, bonds, real estate etc.

CAC itself is a vogue term. It has so many levels of implementations. It not a single event but it is the long drawn process so that the monitory authorities give the gradual relaxation of the limits that they have imposed on the capital flows. For example limit on the outward remittances for the domestic citizen is raised for so many times in recent years. It is now up to one tenth of millions of US dollars per person per year. RBI has taken this step to boost the outward flow of capital. RBI has also lifted almost all restriction on the companies for acquisitions abroad. So that it will spur the outward capital flows.

So many countries have previously tried to go for the capital account convertibility. Every nation, which went for the CAC has the varied results. For some it has been the beneficial to their economy and for some it has turned in to the disaster.

India tried for the fuller CAC for two times. Indian government has constituted two committees both under the leadership of S.S. Tarapore. One in 1997 and other in 2006.

The first time the plans got spooked due to the great south and East Asian currency meltdown. After this crisis government disbanded the idea implementing CAC at that time.

Now government is reviving the idea of the fuller capital account convertibility as it want to make India the financial powerhouse, as the situation is ripe now. So the committee is constituted under S.S. Tarapore, which has given recommendation for the fuller CAC.

So main point for discussion is whether India is ready for the Fuller Capital Account Convertibility?

So my answer is our nation is not ready for the Fuller Capital Account Convertibility.

So I would like to explain my argument in the following way:

So many politicians have raised the concern against the capital outflow and massive currency depreciation.

On the contrary the real problem in implementation of FCAC lies in the massive capital inflow. It is evident from the rapid accumulation of the capital in recent years. It is leading in to rapid rise in the money supply. Due to this India has faced rapid rise in the inflation rate, rising asset prices etc. So it is now leading in to the overheating of the Indian economy.

The most important point is that India still has not yet braced up the idea of fuller capital account convertibility.

There is cap in the external commercial borrowing, cap on the overseas investment in the bond market, etc. Still there is significant restriction on the inflow of capital in India.

The accumulation of the foreign exchange reserves in the last one-year is about 40 billion USD due to large-scale intervention of RBI to prevent rapid appreciation of our domestic currency.

Due to the RBI felt the heat of inflation which arose due to rising money supply growth up to almost 20% Y-o-Y. So recently RBI went for non-intervention in the forex markets due to this value of our domestic currency increased against the dollar about 12 % Y-o-Y.

Now i would like to give one proof to support my argument that RBI is not going to raise the cap on the ECB or any other kind of the overseas borrowing and the contrary it want to restrict the current flows to prevent economy from overheating. So the exact paradoxical thing RBI is doing as compared to the recommendations that S.S. Tarapore Committee has given on for achieving the Fuller Capital Account Convertibility. This act of RBI is the exact role reversal even though they are doing it according to the prevalent situation.

And the global scenario is also adverse for implementation of FCAC. US economy is coping with twin deficits that is fiscal and current account deficit which is running at the level of 800 US billion dollars a year since last few years. The net international investment position is negative by about 2.8 trillion US dollars almost equal to the foreign exchange reserves accumulated by Asian countries. This is the situation when the US economy is its peak of their interest rate cycle. Now US is on the verge of recession as already it is facing slowdown due to rapidly plunging housing market. Even when the interest rates are at the there peak then also dollar has already hit multiyear low against pound and other major currencies in the world and all time low against Euro. If US fed starts lowering the interest rates to keep away its economy from recession then the great slide of US dollar will happen against almost all currencies in the world.

In such situation the investor will always try to escape from dollar denominated assets. They will always find safe heaven in the emerging markets. These markets have to sustain the huge capital flows so to India.

Already with this small amount of capital flow has created lot of inflation and almost 12% appreciation of the Rupee. It is almost impossible for our economy to sustain the rising capital flows without causing any damage to its economy.

We already have lost the competitiveness in the export market viz other developing countries like China etc as we are coping with the appreciation of Rupee, but other competing Asian countries have not faced such kind of appreciation in their currency. It will further slow our exports and our imports will rise, as imported goods will become cheaper. It will further aggravate our grave situation on current account deficit front. This all leads to volatile currency. Such volatility will deter the long-term investors away from the Indian markets. It will lead to the loss of confidence of the foreign investors about the fundamentals of the Indian economy.

My opinion is the current situation is not appropriate for going Fuller Capital Account Convertibility.

So comments, suggestions, questions, and counter arguments on this article are welcome. I request you to make this topic widely discussed on all fronts.

Bye bye

Dr. Gullapalli H.S.

China's Bulging Forex Reserve and Yuan

This is the greatest thing and the greatest advantage against viz india i.e. china's bulging forex reserves which is about 1.3 trillion dollars which is increasing by about 50 billion dollar per month. This might turn fatal in future. The growth in forex reserve is not only due to increasing trade surplus. It is also due to increase capital flow!!! which is seaking returns from yuan appreciation in future.Piculiarity of this growth in the reserve is not associated with serious inflation in chinese economy !!! this is the greatest advantage, future disadvatage equally!!! It might turn in to massive appreciation in Yuan and would like to lead in to prolonged deflation and loss of business confidence, rising bankruptsies due to slowing industries and loss of competitiveness of its own industry and excessing cooling of domestic economy....So this way it it will provide bigger chance for indian industry in the export market viz china and lead to more growth of Indian Economy viz slowing chinese economy mean in other word rabit will definately take a nap !!!!! isn't it?????