Capital Account Convertibility or CAC is a fiscal policy that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at pre-set, fixed market rates.Then local merchants can easily conduct transnational business without needing foreign currency exhanges to handle small transactions.
Full Rupee Convertibility can be divided into two (1)Full currency convertibility (2)A fully open capital account.
Currency Convertibility refers to the absence of any restriction on the holding of foreign currencies by residents and of the national currency by foreigners, and on free conversion between currencies.It does not preclude restrictions on the type and quantity of non-currency assets that residents can hold abroad or foreigners can hold in the country.
An Open Capital Account on the other hand is the absence of restrictions on non-currency asset holding is the absence of restrictions on non-currency asset holding and can exist with out free conversion of the currency.
The issue of India going in for full convertibility is discouraged by Professor Joseph Stiglitz.The economy is booming and needs to be properly managed. Or else, the economy runs the risk of getting overheated. However, many problems are yet to be overcome. For instance, the over dependence on fossil fuels. The service sector is driving the economy.
Source : The Hindu