Question

Advantages and disadvantages of current account convertibility

Answer 1

Current account convertibility refers to the facility which allows partial convertibility of rupee into foreign currency under the liberalised exchange management scheme. Under this scheme 60% of all receipts on current account can be converted into rupees at market determined exchange rate. The remaining 40% has to be surrendered to the Reserve Bank of India at the rates determined by it.

Advantages

1. Easy to send the foreign earnings to India.

2. Facilitates trade activities among different countries.

3. Import and export can be done at fair rates.

Disadvantages

1. High levels of volatility, inflation in forex rates or devaluation may take place due to lack of suitable regulatory control.

2. Indian exports may become less competitive in the international market due to a rising unregulated rupee.

Answer 2

Advantages:
One of the major advantage of current account convertibility is that it helps in rising and improvement of the foreign trade as it lead to the foreign exchange to the domestic currency .
The other advantage is that it provide easiness for sending the foreign earning in to the country.
Moreover export and import occur by this at the fair rates which are usually determined by the market.

Disadvantage:
if not handled well, there can be depreciation of domestic currency by market exchange rate , this can be harmful for the trade.
Also the domestic export may be less competitive as compared to international level if the currency is not regulated well.