India is set for a fundamental shift toward capital account convertibility by increasing integration of offshore and onshore markets, says T Rabi Sankar, deputy governor, RBI. He highlighted the need to review the limits under the liberalized remittance scheme (LRS) that allows Indians to send up to $250,000 abroad annually.
Addressing the 5th annual day of the Foreign Exchange Dealers’ Association of India (FEDAI) on Thursday, Sankar said there is an effort to liberalize FPI debt inflows further with the introduction of the fully accessible route (FAR), which places no limit on non-resident 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,” the deputy governor said. “Debt flows to government securities (G-secs) 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.”
Sankar pointed out that for resident Indians, the amount of capital they send is limited under the LRS. “As the LRS has operated for some time, there may be a need to review it, keeping in mind the changing requirements such as higher education for the youth, the requirement of startups etc. There might even be a case for reviewing whether the limit can remain uniform or can be linked to some economic variable for individuals.”
The deputy governor believes foreigners holding substantial debt holdings might make India vulnerable to the risk of sudden reversals, but it is risked if India is part of global indices. “There is natural safety mechanism as index investors are unlikely to indulge in sudden reversals. It may need to be considered, from a macroprudential perspective, whether the ‘fully accessible route’ should be linked to index inclusion.”
Sankar said banks should prepare to manage the business process changes and the global risks associated with capital convertibility