Download OCB DESK * PRESENT POSITION

Capital Account
Management (CAM)–
Indian Experience
Reserve Bank of India
1
Forex Regime in India
• Flexible exchange rate regime
• Fully convertible on Current Account since
1994
• Capital account convertibility is considered as
a “process” and not an “event”
2
Concomitants for Capital Account
Convertibility
•
•
•
•
GFD to be 3% GDP (5.2%)
Revenue surplus of 1% of GDP (3.9%)
Institutional mechanism for monetary policy i.e. MPC
Inflation rates need to converge towards
internationally acceptable levels (6.1%)
• Banking Sector - promotion of competitive
efficiency, prudential regulatory and supervisory
policies, accounting standards, risk management
systems, etc
• Good corporate governance
• Financial markets fully integrated and widened
Capital account liberalization
• Fairly liberalized regime, more so for nonresidents and domestic corporates
• The financial integration i.e. the ratio of gross
current account and capital account flows to
GDP has gone up from 33% in 1990-91 to 44%
in 1998-99; 112% in 2008-09; and further to
115% in 2012-13
4
CAD and Capital Flows
2006/07 2007/08 2008/09 2009/10 2010-11 2011-12 2012-13
CAD (% of GDP)
1.0
1.4
2.5
2.8
2.8
Net Capital flows
(% of GDP)
4.7
9.5
0.6
3.8
3.7
3.6
4.8
11.3
(14.2)
3.3
3.8
(5)
(13.6)
Rupee appreciation (+)
depreciation (-)
vis-à-vis US$
4.6
4.2
4.8
Indian Context: Two episodes
• Episode I - 2004-08 : Surge in
inflows
• Episode II - 2009 (Post-Lehman),
2011 (Post US downgrade) and
2013 (proposed QE tapering) –
experienced sudden stops and
reversal
Broad principles of Capital Account
Management
1) Preference hierarchy
– Nature of flows
•
•
•
•
Equity over Debt
FDI over Portfolio
Debt for capital formation
Long term over short term
– Agents
• Non-residents
• Residents – Corporates - Financial Sector Individuals
7
Broad principles of Capital Account
Management
2) Pursued active capital account management
• Monetary policy measures
• Prudential measures
• Capital control measures
• Market measures
Broad principles of Capital
Account Management
3) Prudential measures
• Higher risk weight and prudential limits on
exposure to sensitive sectors, such as commercial
real estate and capital market
• Restrictions on externalization of balance sheets
by financial institutions
• Credit risk intermediation of overseas exposures
not allowed
• Unhedged currency exposures of corporates
closely monitored and factored in risk assessment
and pricing
9
Broad principles of Capital
Account Management
• Regulatory driven prudential norms on ALM
mismatches
• Open position in currencies tightly regulated
• Conservative regulations on securitization
• Capital adequacy norms above the Basel
minimum
10
Broad principles of Capital
Account Management
4) Capital control measures
• Predictable regulatory environment on equity
flows
• Corporate debt flows, both short-term and longterm are regulated through price, quantity,
maturity and end-use
• Portfolio debt flows regulated through quantity
and maturity
• Exchange rate volatility partially managed
through tweaking regulations on dynamic
hedging, margins and positions
11
Broad principles of Capital
Account Management
• Debt flows masquerading as equity i.e.
instruments with embedded options and
advances restricted
• FDI in the real estate sector under strict
regime
• Capital flight is regulated tightly. Recently, the
limits on remittances by corporates and
individuals have been reduced
12
Broad principles of Capital
Account Management
5)Market intervention
• Sterilized intervention during too much capital flows- a
situation of private benefit and public cost; but indirect
cost to be reckoned
• Now intervention only to smoothen volatility
• Wide menu of hedging instruments
• Off-shore trading of INR – implications for exchange
rate management
• Too much appreciation or depreciation – implications
on agents
• Special swap window by the Reserve Bank of India
13
Challenges
• Low interest rate environment in some
jurisdictions and flow of carry trade
speculative capital
• Need a common approach and international
consensus; competitive control regimes
14
Economic Inequality
•
•
•
•
Priority sector advances
Initiatives on financial inclusion and financial literacy
JLGs/SHGs empowering women
Rural Self Employment Training Institutes – skill
building and credit linkage
• Guarantee scheme for lending to SMEs
• Interest rate subvention to agriculture and exports
• Sector specific refinance or apex refinancing
institutions
15
Thank You
16