Is capital account convertibility predicated by any such developments or events? 16. As I mentioned earlier, capital flows, first and foremost, are sensitive to macroeconomic policy. Therefore, a freely convertible country must have sound, credible, and time consistent macroeconomic policy. What does that translate to, operationally? Fiscal prudence and low inflation. Where do we stand in respect of these parameters?
I wouldn’t think we are very comfortable here. Both fiscal management and inflation have their own logic and dynamics in a large, diverse, developing country like India. How optimal will it be to throttle social expenditure and blow up interest rates just to attain capital account convertibility? The second threat emanating from capital account convertibility is contagion of disturbance in the global financial markets.