Let CAC be like a tooth fairy.

We ordinary mortals do not understand why from time to time a cry for full capital account convertibility, or CAC, goes up in India. This time our Reserve Bank Governor, Raghuram Rajan has raised the prospect of full convertibility of the rupee, based on the Libor system. CAC allows conversion of currencies at market rates without any restriction. India allows current account convertibility for business, foreign studies and even to buy houses, but not CAC, presumably to deter speculators. Ivy League educated Junior Minister for Finance, Jayant Sinha has voiced full support for CAC. Both gentlemen know infinitely more than us but is it possible that they have are thinking like Americans? In the world, among all the countries, the US is unique in that it controls the only reserve currency in the world, the almighty dollar. The US alone has the right to print as many dollars as it likes, regardless of the effect it has on other economies. If any country prints an excess of its currency it rapidly results in a fall in the value of the currency and a rise in inflation. The quantitative easing adopted by Japan and Europe are just such attempts at currency devaluation in an effort to stave off deflation and increase exports. However, the US being the largest market in the world central banks of other countries buy dollars to keep their exchange rates depressed, to protect exports. Thus, China has foreign exchange reserves of $4 trillion, Japan has $1.25 trillion and India has built up reserves of $343 billion. But buying up dollars releases large amounts of rupees into the market, raising inflation, so then the Reserve Bank has to sterilise this excess liquidity by selling bonds to banks. A massive headache. Adopting CAC will cause huge currency fluctuations which could destabilise our economy as happened during the Asian financial crisis, back in 1998. China wants its currency, the yuan, to become a reserve currency so as to challenge the hegemony of the dollar but is having to defend the yuan against capital outflows. The IMF is warning of the dangers of a sudden rise in the value of the dollar for emerging markets. It maybe good for exports but will increase commodity prices, especially oil, and may cause a sell off in emerging market bonds. Our economy is highly skewed. A comparison with prices in the US shows that everything is cheaper except an iPhone 6, which is 131% of US price, showing how high our taxes are, and office rental is 90% of that in the US, which shows that we are sitting on a huge property price bubble. The daily foreign currency turnover in the world is in excess of $5 trillion which is 2.5 times our annual GDP. Have we forgotten how the pound was hammered out of the ERM in 1992 and George Soros made $1 billion in one week shorting the pound. Let us dream of CAC but let it remain there.