Indians will finally get a flavour of capital account convertibility. The government has raised the annual cap on free outward remittance from $10,000 of $25,000.
The market, however, is keeping its fingers crossed. "This is a major move and reflects a change in mindset, but we can't say to what extent it will create a dollar demand. The real demand will come if dollar starts appreciating... the question is will the government then stop the facility. It will definitely create a demand for strong international currencies like euro," said a senior dealer at a large government bank. Besides, bankers think that authorities will have to ensure the facility is not misused to launder money.
However, the announcement is a landmark in the exchange liberalisation journey. After the depleted forex reserves position of May 1991 followed by a devaluation in July the same year, the country today has a $100bn forex kitty, allowing the government to go in for a free remittance facility.
Foreign exchange liberalisation truly began with the `liberalised exchange rate management system' in 1992 and the entry of FIIs in 1993. Over the past two years, RBI has relaxed various foreign exchange norms to simplify transactions for individuals. This includes raising the basic travel quota to $10,000 and allowing remittances for purposes like education and medical treatment. But this did not prove sufficient to push up dollar demand.
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