Current Account Transactions

The Act defines the term 'current account transaction' as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,

Payments due in connection with Foreign trade, 
  • Other current business
  • Services, and
  • Short-term banking and credit facilities in the ordinary course of business;
  • Payments due as:
  •  Interest on loans and
  • Net income from investments,
  • Remittances for living expenses of parents, spouse and children residing abroad, and
  • Expenses in connection with
  • Foreign travel,
  • Education and
  • Medical care of parents, spouse and children.

In the above definition, the words "without prejudice to the generality of the foregoing such transaction includes" imply that even if the transactions listed above may fit into the definition of capital account transactions, such transactions shall be treated current account transactions. For example, resident of India imports goods from outside India on a short term credit (for a period of less than 6 months), he is creating a liability outside India and thus, it can be treated a capital account transaction but, it is specifically included in the above definition as a current account transaction.

As a general rule, any person may sell or draw foreign exchange if such sale or drawal is a current account transaction. Under the Act, Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Accordingly, the Central Government has issued the Foreign Exchange Management (Current Account Transaction) Rules, 2000. It contains the list of current account transactions for which drawal of foreign exchange is:-

  • Totally prohibited;
  • Permitted, subject to the prior approval of concerned Ministry, Central Government;
  • Permitted, subject to prior approval of the Reserve Bank of India;
  • No restrictions or limits are applicable for undertaking the transactions that are not covered by the above rules and the authorized dealers are free to release foreign exchange upon the satisfaction that the transactions will not involve and is not designed for the purpose of, violation of the Act, or any rules, regulations made there under.

In today's changed scenario, Indian rupee has become fully convertible so far as current account transactions are concerned. This implies that foreign exchange is freely available to the residents for remittance on account of current account transactions for the various purposes like foreign travel, foreign education, and medical treatment abroad etc. The non residents are also freely allowed to remit outside India the income or capital gain generated in India. But, even today, the Indian rupee, in respect of capital account transactions, is not fully convertible.