Convertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control. A currency is said to be fully convertible, if it can be converted into some other currency at the market price of that currency.
At present, Indian rupee is partly convertible on current Account. That is convertibility in the case of transactions relating to exchange of goods and services, money transfer.
In 1997, the Tarapor committee on capital Account convertibility was constituted by the Reserve Bank. This committee indicated three preconditions for capital Account convertibility, they are Fiscal consolidation, a mandated inflation target, strengthening of the financial system.
During March 2006, Prime Minister said that India is moving towards fuller capital account convertibility. In response to this the Reserve Bank of India set up the Tarapore Committee to work out another roadmap for current account convertibility.
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Full currency convertibility of the Indian rupee means, can travel abroad and buy dollars over the counters, currency convertibility refers to the absence of any restriction on the holding of foreign currency by residents and of the national currency by foreigners, and on free conversion between currencies. Can incur expenses abroad using the credit card and pay for the dollars (or pounds, or euros) expanded in rupees.
This helps to invest in specified foreign shares and mutual funds. And also it attracts many foreign tourists, which can be contributed to the GDP.
Therefore, fuller convertibility of Indian rupee helps to attract FDI and also helps Indian’s to invest abroad.