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India on cusp of fundamental shifts in direction of fuller capital account convertibility, says RBI Dy Governor

"Market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility," T Rabi Sankar said.

October 14, 2021 / 04:28 PM IST

The country is on the cusp of fundamental changes in direction of fuller capital account convertibility, Reserve Bank of India (RBI) Deputy Governor T Rabi Sankar said on October 14.

Sankar, while addressing the fifth annual day of Foreign Exchange Dealers’ Association of India (FEDAI), said the rate of change in capital account convertibility -- that is the ability or freedom to convert domestic currency for capital account transactions -- is increasing in India.

"India has come a long way in achieving increasing levels of convertibility on the capital account. It has broadly achieved the desired outcome for the policy choices it has made, in terms of achieving a stable composition of foreign capital inflow," he said.

"At the same time, India is on the cusp of some fundamental shifts in this space with increased market integration in the offing and freer non-resident access to debt on 11 the table," Sankar added.

The rate of change in capital convertibility will only increase with "each of these and similar measures", he claimed.

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With this increase comes the responsibility to ensure that such flows are managed effectively with the right combination of capital flow measures, macro-prudential measures and market intervention, Sankar noted.

"Market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility," he said.

On the role of the central bank, Sankar suggested that it is restricted to taking precautionary measures.

"The regulator’s job is somewhat different. As someone once said, 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.

"The quality of the dish – that is, the efficiency with which investment needs of the country are met - is up to how well Authorized Dealers and other intermediaries adjust to the increasingly fuller capital account convertibility," the RBI deputy governor added.

Sankar's remarks come over a month after RBI Governor Shaktikanta Das, while speaking to CNBC TV 18, said India is not fully convertible in the capital account. "Having said that, India is almost there, as there are no restrictions on outflows. The G-SEC market is most liquid in India," he added.
Moneycontrol News
first published: Oct 14, 2021 04:28 pm

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