Currency convertibility
Also called: Convertibility · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Currency convertibility is the freedom to exchange the national currency for a foreign currency at the market rate. In the past, the promise was to convert it into gold at a fixed price. Convertibility can be of two kinds. Current account convertibility covers trade, services and remittances. Capital account convertibility also covers buying and selling assets such as shares, bonds and property. Foreigners accept a currency more readily when they trust that they can convert it freely.
Example
India moved to current account convertibility in August 1994 by accepting IMF Article VIII. Since then, an importer can freely buy dollars to pay for goods. India's capital account is still only partly convertible.
Don't confuse with
- Current vs capital account convertibility: India has full convertibility only for current transactions. "India has full capital account convertibility" is FALSE.
- Currency speculation: this means holding a currency to profit from a rise in its value. Convertibility is only the freedom to exchange it.
Related concepts
- Current account convertibility
- Capital account convertibility
- Capital controls
- Liberalised Remittance Scheme