Capital Account Convertibility means that rupee can now be freely convertible into any foreign currencies for the acquisition of assets like shares, properties, and assets abroad. Further, the banks can accept deposits in any currency.
Currency convertibility means “the freedom to convert one currency into other internationally accepted currencies, wherein the exporters and importers were allowed a free conversion of a rupee.But still, none was allowed to purchase any assets abroad.
So 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 ‘yen’ easily?
Also Read: What is repo rate?
Considering that exchange rate is better in terms of INR-JPY, the foreigner would want to convert the currency into yen..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.
Capital account convertibility
It means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.It refers to the removal of restraints on international flows on a country’s capital account, enabling full currency convertibility and the opening of the financial system. Capital account convertibility is considered to be one of the major features of a developed economy. It helps attract foreign investment.At the same time, capital account convertibility makes it easier for domestic companies to tap foreign markets. It is sometimes referred to as Capital Asset Liberation.
Current account convertibility
Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. In other words, it allows residents to make and receive trade-related payments — receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts, etc.
Also Read: The Balance of payment on current and capital accounts