What is Capital Account Convertibility (CAC) ?
Can anyone explain CAC & how lack of Full Capital Account Convertibility is helping in slowing down the decline of rupee ?
What is meant by ECB in simple terms ?
CAC is related to capital account - which is related to investments and loans (while current account relates normal trade/individual foreign buying etc). The CAC allows complete conversion if rupee into any other currency (here dollar - generally huge sums) without the consent of RBI. But, now there have been substantial restrictions on the same.
Why? Because Rupee is devaluing - meaning demand for rupee going down and dollar increasing - so if more people start converting rupee to dollar under CAC - the pressured on rupee will go up further.
ECB: is external commercial borrowing. Indian corporates and PSUs can take loans from foreign bodies (as in Europe and US the interest rate is near to zero). So in good times, our corporates took such loans, thinking why take loans from SBI at 10% (just for eg.). Now, when rupee devalued - there loan amount needed swelled up (as the payback will be in dollar). They got into a thing called - ecxhange rate risk - which was not hedged - as hedging requires separate strategy (which either our corporates lacked or they didn't bother).
Can anyone explain CAC & how lack of Full Capital Account Convertibility is helping in slowing down the decline of rupee ?
What is meant by ECB in simple terms ?
CAC is related to capital account - which is related to investments and loans (while current account relates normal trade/individual foreign buying etc). The CAC allows complete conversion if rupee into any other currency (here dollar - generally huge sums) without the consent of RBI. But, now there have been substantial restrictions on the same.
Why? Because Rupee is devaluing - meaning demand for rupee going down and dollar increasing - so if more people start converting rupee to dollar under CAC - the pressured on rupee will go up further.
ECB: is external commercial borrowing. Indian corporates and PSUs can take loans from foreign bodies (as in Europe and US the interest rate is near to zero). So in good times, our corporates took such loans, thinking why take loans from SBI at 10% (just for eg.). Now, when rupee devalued - there loan amount needed swelled up (as the payback will be in dollar). They got into a thing called - ecxhange rate risk - which was not hedged - as hedging requires separate strategy (which either our corporates lacked or they didn't bother).
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