India is not ready for full capital account liberalisation at this point in time, according to Reserve Bank of India Deputy Governor HR Khan.
Capital account liberalisation means freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. In other words, it is the freedom to convert local financial assets into foreign financial assets and vice versa.
“The pros and cons of full capital account openness is a contentious issue and in any case, we are not ready for it at this point in time,” the Deputy Governor said in his keynote address at a management institute.
Referring to the current theme in contemporary discourse - Bond-Currency-Derivatives (BCD) nexus, Khan said this is an ideal objective in an open economy financial system.
“What it means is this: any foreign investor, using any international currency, can buy an Indian Government or corporate liability denominated in rupees or otherwise and hedge all risks, either onshore or offshore, the attendant credit, interest rate and currency risks.
“This is a natural prerequisite for free international capital movements, and from an Indian perspective, for mobilisation of the much-needed resources,” he explained.
However, Khan underscored that the problem is inherent in the proposition itself. This presupposes complete capital amount openness, particularly for financial institutions and transactions.
Khan observed that BCD nexus is neither absolutely necessary nor a sufficient condition for mobilising resources for investment to support economic growth.
In this regard, he pointed out the growth story of post-war Japan, that of China of the last two decades and even of India before the crisis to support this point.
Meanwhile, to provide a boost to currency futures, some more relaxations like enhancing the limit up to which exposure will not require the proof of the underlying exposure and procedural simplification relating to documentation are being examined by the Reserve Bank of India.