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Transcript
India’s Experience with Capital Flow
Management
Rajiv Ranjan
Director
Department of Economic and Policy Research
Reserve Bank of India
Meeting of BRICS Economic Research Group
February 27, 2011
New Delhi
1
Outline
 Trends in Capital Flows to India
 India’s Approach to Capital Account Management
 Lessons from Capital Account Management in
India
2
Trends in Capital Flows to India
Table I: Key Components of Balance of Payments
(US$ Million)
Crisis Year
Period Average
1990-91
1991-92
1992-93 to
2002-03
2003-04 to
2007-08
2008-09 to
2010-11
103
133
4,549
20,036
33,231
97
129
2,360
6,544
16,566
6
4
2,189
13,492
16,664
7,069
4,272
3,885
17,913
19,884
2.1 External Assistance, Net
2,204
3,034
747
931
3,424
2.2 ECBs, Net
2,254
1,462
1,393
8,698
7,456
2.3 NRI Deposits, Net
1,536
290
1,773
1,993
3,483
2.4 Short Term Trade Credits
1,075
-514
-28
6,290
5,521
16
-628
184
7,050
-14,118
7,188
3,777
8,617
44,999
38,997
5. Current Account Balance
-9,680
-1,178
-2,340
-4,718
-36,860
6. Change in Reserves (5+6)
(+: Increase/-: Decrease)
-2,492
2,599
6,277
40,280
2,137
1. Equity
1.1 Net FDI
1.2 Portfolio Investment
2. Debt
3. Other Capital
4. Capital Account Balance (1+2+3)
3
Trends in Capital Flows to India
Table II: Relative Share of Debt and Equity in Capital Flows
(in per cent)
Crisis Year
Period Average
1990-91
1991-92
1992-93 to
2002-03
2003-04 to
2007-08
2008-09 to
2010-11
1. Equity
1.5
3.0
54.0
52.8
62.6
1.1 Net FDI
1.4
2.9
28.0
17.2
31.2
1.2 Portfolio Investment
0.1
0.1
26.0
35.6
31.4
2. Debt
98.5
97.0
46.0
47.2
37.4
2.1 External Assistance
30.7
68.9
8.8
2.5
6.4
2.2 External Commercial Borrowings
31.4
33.2
16.5
22.9
14.0
2.3NRI Deposits, net
21.4
6.6
21.0
5.2
6.6
2.4 Short Term Trade Credits
15.0
-11.7
-0.3
16.6
10.4
Note: Equity Debt composition of Capital Accounts excludes other capital
4
Trends in Capital Flows to India
Table III: Key Components of BoP as a percentage of GDP
(in per cent)
Period Average
Crisis Year
1. Equity
1.1 Net FDI
1.2 Portfolio Investment
2. Debt
2.1 External Assistance, Net
2.2 External Commercial Borrowings, Net
2.3NRI Deposits, Net
2.4 Short Term Trade Credits
3. Other Capital
4. Capital Account Balance (1+2+3)
5. Current Account Balance
6. Change in Reserves (5+6)
(+: Increase/-: Decrease)
Memo Item:
Real GDP Growth Rate
1990-91
1991-92
1992-93 to
2002-03
2003-04 to
2007-08
2008-09 to
2010-11
0.0
0.0
0.0
2.2
0.7
0.7
0.5
0.3
0.0
2.2
-3.0
0.0
0.0
0.0
1.6
1.1
0.6
0.1
-0.2
-0.2
1.4
-0.4
1.2
0.6
0.6
1.0
0.2
0.4
0.4
0.0
0.0
2.2
-0.6
2.3
0.8
1.5
2.0
0.1
1.0
0.2
0.7
0.8
5.1
-0.5
2.3
1.1
1.2
1.4
0.2
0.5
0.3
0.4
-1.0
2.7
-2.6
-0.8
1.0
1.6
4.6
0.1
5.3
1.4
5.8
8.7
5
7.8
Trends – 2007-08 - Deluge
Example 1: During the phase of high inflows
 Net capital flows to India increased from US$ 45 billion in 2006-07
to US$ 107 billion during 2007-08
 Inflows excess of CAD (US$ 15 billion) – Reserve accretion of
US$ 92 billion
 RBI used a number of instruments in combination to manage the
surplus;

Around US$ 78 billion purchases of forex





MSS (US$ 26 billion)
CRR ( US$ 12 billion)
LAF
OMO
Combination of GOI surplus balances, Foreign exchange swaps,
liberalization of capital outflows, pre-payment of external debt,
lowering of interest rates on NRI deposits
6
Trend – 2008-09- Crisis
Example 2: Experience during the crisis and RBI policy
measures
 During 2008-09 capital flows ebbed to US$ 9 billion.
 CAD rose to US$ 29 billion – Reserves declined
 Volatility in capital flows translated into sharp volatility in
the exchange rate. Drying up of forex liquidity,
 RBI took several measures to ease liquidity;




Rupee-dollar swap facility for Indian banks
Special Market Operations (SMO)
Upward adjustment of the interest rate ceiling on NRI deposits,
relaxation in the ECBs and short-term trade credits.
Domestic liquidity enhancing measures- OMO, special repos, buyback
of MSS securities (de-sequestering), special refinance facilities, sharp
and swift reduction in policy rates
7
Capital Account Management – Changing Views
 Bretton Woods institutions have reversed their earlier
approach
 IMF (2010):
“circumstances in which capital controls can be a
legitimate component of the policy response to surges
in capital flows”
 The World Bank :
“capital controls might need to be imposed as a last resort
to help mitigate a financial crisis and stabilize
macroeconomic developments.”
 G20: Acceptance
8
Capital Account Management in India
 Capital account liberalization began in 1991 following balance of
payments (BoP) crisis
 The analytical foundations for reforms were provided by three
reports:
 Report of the High Level Committee on Balance of Payments
(Chairman: C. Rangarajan, 1991) and
 Two reports on Capital Account Convertibility (Chairman:
S.S.Tarapore, 1997 and 2006).
 Reports suggested:
i.
Encouragement to private capital inflows
ii.
Shift from debt creating to non-debt creating flows
iii.
Within debt - A shift from short-term to long-term debt
iv.
Monitoring of external commercial borrowings
9
v.
Gradual liberalisation of outflows.
India’s Approach to Capital Account Management
 India has used mild capital controls as a part and parcel of
the liberalized process- to grant 'a breathing space' to
implement more fundamental reforms
 The policy approach in India to the issue of capital flows has
evolved from the broader objective of maintaining financial
and macroeconomic stability.
 sequencing of the process conditional on underlying
domestic macroeconomic fundamentals and sustainability of
the BoP.
 The CAL is a process rather than an event.
10
Capital Account Management: Salient elements
 An explicitly stated active capital account management
framework- Non-debt creating Flows and Long Term Flows
 Policy space to use multiple instruments
 Short-term debt permitted only for trade transaction
 Avoiding the ‘original sin’
 Prudential regulations to prevent excessive dollarisation of
balance sheets of financial sector intermediaries - banks
 Cautious approach to liability dollarisation by domestic entities
 Significant liberalisation of permissible avenues for outward
investments for domestic entities
11
Capital Account Liberalization - current status
 Considerable Progress made. Non-residents provided
considerable extent of convertibility - Can invest through
portfolio investment route- Recently QFI including
individuals and groups permitted to invest
 Residents: More restricted - Corporates, financial
institutions & individuals
 Corporates- ADRs/GDRs/ECB
 Banks can borrow up to 50 % of unimpaired Tier I capital
 Outward Investment –




Corporates 400% of net worth
Banks can invest abroad upto 25 % of DTL
Mutual Funds can invest abroad with agg. Limit of US$ 7 billion
Individual can remit upto US$ 100,000 per annum
12
Capital Account Management: Instruments
 Preference: FDI over FII; Rupee over FC; LT over ST
 FDI is freely allowed subject to sectoral limit – ceilings
revised upward; certain sectors prohibited; Outward Also
 Foreign Portfolio Investment –No prior approval- sectoral
and individual limits - no reversal of policies
 Debt flows – ECB and NRI deposits modulated- both Price
and quantity


FII Investment in Sovereign debt – US$ 15 billion
FII Investment in corporate debt – US$ 45 billion
 ECB – Automatic and approval Route; All in Cost ceiling;
End use restrictions and minimum maturity.
 NRI deposits - interest rate ceiling linked to LIBOR/SWAP
 In sum, gradual and calibrated liberalization - sequencing 13
Lessons from Capital Account Management in India
1. It is necessary to integrate the capital account management
(CAM) with other policies.

Especially fiscal management, regulation of the financial sector and
monetary policy
2. CAM should be treated as an essential component of
countercyclical policies.
3. CAM cannot be divorced from the development in foreign
exchange markets and developments in current account.
4. To ensure credibility and effectiveness of the CAM, it is
necessary to ensure that there is full commitment of the
public policy both at the level of the government and the
central bank.
14
Lessons from Capital Account Management in India
5. CAM may involve both price and administrative measures.
6. Capacity of the central bank to intervene at the time of the
depreciation of the currency is limited , while not so in
appreciation. So policy in reduction in volatility has to
incorporate necessary caution in strategies adopted.
7. Nature of capital flows and the complexity in the operations
of financial intermediaries keep changing requiring
sufficient flexibility in the CAM measures .
8. CAM is a tool that is necessary at all times, even when used
as a purely temporary measure.
9. The critical part of CAM relates to the financial sector
where the stability of financial institutions and the
exchange rate are closely inter-twined- Important
regulation of financial sector
15
Trends in Capital Flows to India (Contd..)
External Sector Vulnerability Indicators (Per cent)
End-March
2008
End-March
2011
End-Sep
2011
1. Ratio of Total Debt to GDP
2. Ratio of Short-term to Total Debt (Original
Maturity)
3. Ratio of Short-term to Total Debt (Residual
Maturity)
18.1
20.4
17.4
21.9
Indicators
37.6
21.2
42.2
-
4. Ratio of Concessional Debt to Total Debt
19.7
15.5
14.7
5. Ratio of Reserves to Total Debt
138.0
99.5
95.4
6. Ratio of Short-term Debt to Reserves
14.8
21.3
22.9
7. Reserves Cover of Imports (in months)
14.4
9.6
8.5
8. Reserves Cover of Imports and Debt Service
Payments (in months)
9. Debt Service Ratio (Debt Service Payments to
Current Receipts)
13.6
9.1
8
4.8
4.3
4.9
10. External Debt (US$ billion)
224.4
306.4
326.6
-: Not available
16
Infrastructure financing with global savings





To facilitate infrastructure financing 100 per cent FDI is allowed
under the automatic route in some of the sectors
FDI is also allowed through the Government approval route in
some other sectors
Debate on possibility of using foreign exchange reserves for
investment in infrastructure sector

Reserves for such purposes does not meet the criterion of
reserve management objectives
However, a special and limited window has been created

RBI invests in Special Purpose Vehicles (SPV) of the IIFCL
Investment on repatriation basis by new class of eligible nonresident investors in Rupee and Foreign Currency denominated
bonds issued by IDF-NBFCs and Rupee denominated units issued
by IDF-MFs
17
Infrastructure financing with global savings


Opening of debt market to foreign investors with a three year
lock-in period
RBI has liberalised and rationalised the ECB policies concerning
infrastructure sector

The limit for corporates implementing infrastructure projects to avail
ECB in a financial year raised to USD 750 million from USD 500
million under the automatic route

Indian companies in the infrastructure sector allowed to import
capital goods by availing of short-term credit in the nature of ‘bridge
finance’

Indian companies in the infrastructure sector allowed to avail of ECB
in Renminbi, under the approval route
18
Thank You
19