RBI: India on verge of shift to capital a/c convertibility

India is on the cusp of a fundamental shift toward capital account convertibility by increasing integration of offshore and onshore markets and allowing non-residents freer access to debt markets, RBI deputy governor T Rabi Sankar has said. According to him, there is a need to review the limits under the liberalised remittance scheme that allows Indians to send up to $250,000 abroad annually, keeping in mind the needs of higher education and startups.

The deputy governor’s statement on moving ahead on convertibility comes at a time when the country is seeing huge capital inflows through foreign portfolio investments and foreign direct investments, including private equity funding of startups. Statements in support of convertibility are seen as signs of confidence on the external front as, typically, the RBI has eased capital restrictions so that overseas investments can counterbalance inflows.

“There is an effort to liberalise FPI debt flows further with the introduction of the fully accessible route, which places no limit on nonresident investment in specified benchmark securities. Since over time, virtually all securities will fall under the FAR category, the move is unambiguously towards eventual unfettered access for non-residents into government securities,” said Sankar, speaking at the 5th annual day of the Foreign Exchange Dealers’ Association of India.

Sankar said that debt flows to government securities are likely to increase after limits are raised. “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 future,” he said.

According to Sankar, foreigners holding substantial debt holdings might make India vulnerable to the risk of sudden reversals. However, this risk is reduced if India is part of global indices.

The deputy governor said that banks should prepare themselves to manage the business process changes and the global risks associated with capital convertibility. He said that the job of the regulator was limited. “The job of a regulator is like the gas regulator in the kitchen — it cannot ensure the quality of the dish, but it can prevent the kitchen from blowing up,” he said.

No comments: