RBI hints at moves to ease capital controls

Mumbai:  The Reserve Bank of India (RBI) deputy governor T. Rabi Sankar on Thursday said that market participants, particularly domestic banks, need to be prepared to manage challenges that arise as India moves further into liberalisation of capital account convertibility, with foreign investors getting more access to the debt market.

Sankar also hinted at the next few things on the central bank’s mind such as the nature of index inclusion, the need to review the liberalized remittance scheme (LRS) and allowing non-resident to hold rupee accounts. Experts, however, said a bigger challenge for the RBI would be managing the ‘impossible trinity’ that is exchange rate, free capital flows and independent monetary policy.

“Market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility,” said Sankar while addressing the Foreign Exchange Dealers' Associ-ation of India's meeting.
Sankar said there is an effort to liberalise FPI debt flows further with the introduction of the Fully Accessible Route (FAR) which places no limit on non-resident investment in specified benchmark securities. Efforts to get India included under global bond indexes and the complementary move towards placing G-secs under global custodians, once implemented, will encourage debt flows in the future. He said with the Fully Accessible Route, over time the entire G-sec issuance would be eligible for non-resident investment.

“While experience of other countries suggest that non-residents are unlikely to hold a major portion of outstanding stock, substantial debt holdings might make India vulnerable to the risk of sudden reversals.”

Sankar said that from a macroprudential perspective, it needs to be considered whether FAR should be linked to index inclusion. Similarly, there might even be a case for reviewing whether the limit under the LRS can remain uniform or can be linked to some economic variable for individuals.

G. Ananth Narayan, associate professor at SP Jain Institute of Management and Research, said, “RBI has progressed quite a bit with the FAR securities, efforts to include India debt into global indices, towards settling Indian bonds on global clearing platform like Euroclear and integrating offshore NDF market with the onshore market. Now, the deputy governor has hinted at the next few things on RBI’s mind, including the nature of index inclusion, the need to review the LRS scheme, and considering allowing non-resident to hold rupee accounts. These steps are very welcome and progressive and come with their own challenges.”

“One thing that the deputy governor did not mention is that we have an independent inflation targeting monetary policy framework and there is an ‘impossible trinity’ which says that you cannot have an independent monetary policy framework, a stable currency market and free capital flows at the same time. As India progresses on fuller capital convertibility, the impossible trinity can become a bigger issue of debate,” he added.

Ashutosh Khajuria, ED, Federal Bank said, “The RBI continues to remain cautious on debt capital flows.”