What are the dangers of CAC to the Indian economy?
As more money flows in and out of the country it becomes difficult to control the price of the rupee due to the large amounts involved. This could raise difficulties for the RBI which could have to buy or sell larger and larger amounts of dollars if it wished to manipulate the rupee dollar rate. It would end up building up even larger reserves than it has currently. These create difficulties in setting interest rates according to the needs of the Indian economy. Capital account convertibility means that eventually the rupee has to be allowed to become more flexible. Then why is India opting for full capital account convertibility at this stage? With effective convertibility already in place for all except honest citizens, a policy that penalises honest Indian citizens becomes indefensible. Shifting to convertibility is, to a significant extent, about converting the de facto to the de jure. Moreover, the case for manipulation of the exchange rate of the rupee by the RBI is weak. India i
