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Who is afraid of capital convertibility?

April 19, 2015

Abstract: The global financial crisis (GFC) of 2008 changed the nature of the debate on capital convertibility. Earlier, unconditional support for a policy regime favouring progressively higher capital account convertibility used to be the norm, primarily on the grounds of efficiency gains.  After the GFC — which resulted in massive bouts of volatility in capital flows and major disruptions in several economies — the potential risks and pitfalls associated with higher degree of capital account convertibility have also come under focus. The benefits of steadily moving towards full convertibility are still recognized, but only if the economy has the capacity and instruments to protect itself against extreme volatility in capital flows. In this context, some issues and trade-offs facing the Indian policy makers are also discussed.

Keywords: capital account convertibility; global financial crisis (GFC); volatility; efficiency gains; risk; trade-off; policy; disruption

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