All financial exchanges between one country and another country of the rest of the world are made up of the current account transactions (such as exports and imports of goods and services of a country) and the capital account transaction that reflects net change in ownership of national assets. Capital account includes all kinds of investment assets like shares, debt, and property, or even corporate assets like the goods produced by an Indian subsidiary of a foreign company.
Current account convertibility implies easing restrictions on current international transactions and liberalisation for payment of current transactions at market determined price involving foreign exchange. During mid-1990s ((operationalized on August 19, 1994), the rupee was made fully convertible in India for current account for all trading activities, remittances and indivisibles. India was obliged to formalize current account convertibility so as to comply with Article VIII of the International Monetary Fund (IMF) which prohibits any exchange restrictions on current international transactions.
The Current Account Convertibility allows free movement of foreign currency inward and outward for any amount for the trade purposes of imports and exports, Inward and outward remittances in foreign currency, accessing foreign currency for travel, study abroad, medical and tourism purpose etc. at existing market rates. However, capital account convertibility is still partially convertible in India. It means Indians are allowed to buy and sell goods and services under the course of current account convertibility but they still require regulatory approvals if they want to invest or purchasing assets overseas beyond the pre-determined limit. Further, restrictions remain on foreign direct investments in India on certain sectors like insurance or retail (Investments are capped at a specific percentage) and for higher limit for investments in such sectors require regulatory approvals.
Even though the Current Account Convertibility allows free inflow/outflow of foreign currency to and from India with lot of freedom to exchange at market rates, the requirement of higher amount of foreign currency beyond the limit fixed for purchase of foreign currency for travel, study abroad, medical, and tourism purpose etc. under liberalized remittance scheme still needs regulator’s approval. Further, in case of extreme volatility in Rupee exchange rates in foreign currency market, RBI swings into action by purchasing/selling U.S. dollars (kept as foreign reserve) to stabilize the rupee and keep the exchange rates within the permissible rates.