currency to deposit ratio the proportion of currency that people in the economy want to hold relative to their deposits;

it equals currency divided by deposits.

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The idea originated with the School of Salamanca in the 16th century [1] and was developed in its modern form by Gustav Cassel in 1918.[2] The concept is founded on the law of one price; the idea that in absence of transaction costs, identical goods will have the same price in different markets. In its "absolute" version, the purchasing power of different currencies is equalized for a given basket of goods. In the "relative" version, the difference in the rate of change in prices at home and abroadthe difference in the inflation ratesis equal to the percentage depreciation or appreciation of the exchange rate. The best-known and most-used purchasing power parity exchange rate is the Geary-Khamis dollar (the "international dollar"). PPP exchange rate (the "real exchange rate") fluctuations are mostly due to different rates of inflation between the two economies. Aside from this volatility, consistent deviations of the market and PPP exchange rates are observed, for example (market exchange rate) prices of nontraded goods and services are usually lower where incomes are lower. (A U.S. dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States). Basically, PPP deduces exchange rates between currencies by finding goods available for purchase in both currencies and comparing the total cost for those goods in each currency.[3]
In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.) An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. The relative version of PPP is calculated as:

Where: "S" represents exchange rate of currency 1 to currency 2 "P1 " represents the cost of good "x" in currency 1 "P2 " represents the cost of good "x" in currency 2
TRANSFER PAYMENTS One-way payment of money for which no money, good, or service is received in exchange. Governments use such payments as means of income redistribution by giving out money under social welfare programs such as social security, old age or disability pensions, student grants, unemployment compensation, etc. Subsidies paid to exporters, farmers, manufacturers, however, are not considered transfer payments. Transfer payments are excluded in computing gross national product.

Money given by the government to its citizens. Examples include Social Security, unemployment compensation, welfare, and disability payments.

CAC (Capital Account Convertibility) in the Indian Economy

CAC (Capital Account Convertibility) for Indian Economy refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe. In fact, the authorities officially involved with CAC (Capital Account Convertibility) for Indian Economy encourage all companies, commercial entities and individual countrymen for investments, divestments, and real estate transactions in India as well as abroad. It also allows the people and companies not only to convert one currency to the other, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned.

Following are the pre-requisites for Capital Account Convertibility in India:

The Tarapore Committee appointed by the Reserve Bank of India (RBI) was meant for recommending methods of converting the Indian Rupee completely. The report submitted by this Committee in the year 1997 proposed a three-year time period (19992000) for total conversion of Rupee. However, according to the Committee, this was possible only when the following few conditions are satisfied: The average rate of inflation should vary between 3% to 5% during the debt-servicing

the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000

Evolution of CAC in India economic and financial scenarios:

In 1994 August, the Indian economy adopted the present form of Current Account Convertibility, compelled by the International Monetary Fund (IMF) Article No. VII, the article of agreement. The primary objective behind the adoption of CAC in India was to make the movement of capital and the capital market independent and open. This would exert less pressure on the Indian financial market. The proposal for the introduction of CAC was present in the recommendations suggested by the Tarapore Committee appointed by the Reserve Bank of India.

Reasons for the introduction of CAC in India:

The logic for the introduction of complete capital account convertibility in India, according to the recommendations of the Tarapore Committee, is to ensure total financial mobility in the country. It also helps in the efficient appropriation or distribution of international capital in India. Such allocation of foreign funds in the country helps in equalizing the capital return rates not only across different borders, but also escalates the production levels. Moreover, it brings about a fair allocation of the income level in India as well.

The forecasts made by the Tarapore Committee regarding Indian CAC are as follows:

average inflation rate of 3% to 5% will exist for a three-year time period, from1997-98 and 1999-2000.

orming assets will experience a decline to 12%, 9% and 5% by the years 1997-98, 1998-99 and 1999-

vely, with respect to the total or aggregate advances.

1997-98, there will be a complete deregulation of the structure of interest rate.

cal deficit will fall from 4.5% in 1997-98 to 4.0% in 1998-99 and further to 3.5 % in 1999-2000, with GDP.

Benefits and drawbacks of CAC:

To sum up, CAC is concerned about the ownership changes in domestic or foreign financial assets and liabilities. It also represents the formation and liquidation of financial claims on or by the remaining world. It enables relaxation of the Capital Account, which is under tremendous pressure from the commercial sectors of India. Along with the financial capitalists, the reputed commercial firms in India jointly derive and enjoy the benefits of the CAC policy, which speculate the stock markets through investments. In fact, the CAC policy in India is pursued primarily to gain the speculator's and the punter's confidences in the stock markets. However, CAC does not serve the purposes of the real sectors of Indian economy, like eradication of poverty, escalation of the employment rates and other inequalities.In spite of CAC being present in Indian economy, there will be a co-existence of financial crises. Despite several benefits, CAC has proved to be insufficient in solving the Indian financial crises, the complete solution of which lies in having a regulated inflow of capital into the economy.
Convertibility can be related as the extent to which a country's regulations allow free flow of money into and outside the country. For instance, in the case of India till 1990, one had to get permission from the Government or RBI as the case may be to procure foreign currency, say US Dollars, for any purpose. Be it import of raw material, travel abroad, procuring books or paying fees for a ward who pursues higher studies abroad. Similarly, any exporter who exports goods or services and brings foreign currency into the country has to surrender the foreign exchange to RBI and get it converted at a rate pre-determined by RBI. After liberalization began in 1991, the government eased the movement of foreign currency on trade account. I.e. exporters and importers were allowed to buy and sell foreign currency, as long as the items that they are exporting and importing were not in the banned list. They need not get permission on a CASE TO CASE basis as was prevalent in the earlier regime. This was the first concrete step the economy took towards making our currency convertible on trade account. In the next two to three years, government liberalized the flow of foreign exchange to include items like

amount of foreign currency that can be procured for purposes like travel abroad, studying abroad, engaging the services of foreign consultants etc. This set the first step towards getting our currency convertible on the current account. What it means is that people are allowed to have access to foreign currency for buying a whole range of consumable products and services. These relaxations coincided with the liberalization on the industry and commerce front - which is why we have Honda City cars, Mars chocolate bars and Bacardi in India. There was also simultaneous relaxation on the restriction on the funds that foreign investors can bring into India to invest in companies and the stock market in the country. This step led to partial convertibility on the Capital Account. "Capital Account convertibility in its entirety would mean that any individual, be it Indian or foreigner will be allowed to bring in any amount of foreign currency into the country and take any amount of foreign currency out of the country without any restriction." Indian companies were allowed to raise funds by way of equities (shares) or debts. The fancy terms like Global Depository Receipts (GDRs), Euro Convertible Bonds (ECBs), Foreign currency syndicated loans became household jargons of Indian investors. Listing in Nasdaq or NYSE became new found status symbols for Indian companies. However, Indian companies or individuals still had to get permission on a case to case basis for investing abroad. In 2000, the forex policy was further relaxed that allowed companies to acquire other companies abroad without having to go through the rigmarole of getting permission on a case to case basis. Further, Indian debt based mutual funds were also allowed to invest in AAA rated government /corporate bonds abroad. This got further relaxed with Indians being allowed to hold a portion of their foreign exchange earnings as foreign currency, subject to a limit in the recent monetary policy in October 2002. In general, restrictions on foreign currency movements are placed by developing countries which have faced foreign exchange problems in the past is to avoid sudden erosion of their foreign exchange reserves which are essential to maintain stability of trade balance and stability in their economy. With India's forex reserves increasing steadily, it has slowly and steadily removed restrictions on movement of capital on many counts. The last few steps as and when they happen will allow an individual to invest in Microsoft or Intel shares that are traded on Nasdaq or buy a beach resort on Bahamas without any restrictions Read more: http://wiki.answers.com/Q/What_is_rupee_convertibility#ixzz18Yrk8vMZ