Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa for trade in goods and invisibles (services, transfers or income from investment). Individuals and entities can convert currencies in the foreign exchange market.
Current account convertibility is one part of currency convertibility. The other part is capital account convertibility. Current account and capital account convertibility indicate the purpose for which currency is converted.
Currency convertibility refers to the freedom to convert domestic currency into other internationally accepted currencies and vice versa. Exporters, importers, foreign investors, domestic investors investing abroad, residents and corporate etc., would like to convert domestic currency into foreign currency and vice versa to meet their international engagements.
Example
When there is current account convertibility for rupee, an exporter can sell the US Dollars (or other foreign currency) he obtained from exporting a commodity at the market determined exchange rate in India. This means that there is no exchange controls (foreign exchange controls). Similarly, when an importer buys foreign currency from India’s foreign exchange market by exchanging rupee, it is current account convertibility.
Introduction of full current account convertibility in India
In India, there is full current account convertibility since August 20, 1993. A series of measures were launched then to liberalise exchange controls and the exchange rate system was shifted to market- determined exchange rates since March 1993. After that, on August 20, 1993, the RBI announced that that the rupee became fully convertible on current account. This was after India accepted the status and obligations of Article VIII with the IMF.
