RBI deputy governor B P Kanungo bats for capital account liberalisation

Reserve Bank of India (RBI) Deputy Governor B P Kanungo has argued in favour of revisiting India’s capital control regime and letting companies invest overseas more freely to secure the country’s energy and economic needs. 

While the rupee can freely be converted on the current account, the central bank imposes limits in the case of the capital account. This means one cannot take out the rupee beyond a particular limit to use it overseas.

“The creation of overseas assets by resident Indians goes as a credit entry in the international investment position. Therefore, rather than looking at dividend earning, there is a need to look at value enhancement,” Kanungo said at the annual conference of the Foreign Exchange Dealers’ Association of India (FEDAI), in Beijing last week. The speech's copy was uploaded on the RBI’s website on Thursday.

“The acquisition of strategic and economic assets, such as coalfields, oilfields, etc, is a long-term priority,” he said, adding, “overseas investment can perhaps be seen as export, not of capital but of entrepreneurship”. The deputy governor said start-ups were using the holding company structure to invest in India because of the ease of raising capital in a foreign jurisdiction. “We, along with the government of India, shall take a relook at any misgivings about regulatory regime in this regard and take necessary corrective action.”

The three preconditions needed for capital account liberalisation would be price stability, fiscal stability, and the stability of financial institutions and markets. “As we speak today, achievements in respect of the stated parameters vary. The fiscal deficit at the general government level needs consolidation. It is desirable that growth along with low inflation and fiscal prudence become well entrenched before we take quantum steps towards a more open capital account. Besides, there are signs of global headwinds, though in the distant horizons,” said Kanungo.

There are nuances of capital account liberalisation, but the hierarchy for the central bank would be to encourage flows in the real sector over flows into the financial sector. “Second, equity-related capital inflows will have preference over debt inflows. Within the equity flows, direct investment flows will be preferred to portfolio flows and in so far as debt flows are concerned, preference for long-term debt and rupee-denominated debt – whether bilaterally contracted or through marketable securities – shall continue.”

“The regulatory framework will continue to strive to make the on-shore derivative markets accessible to all non-residents with a rupee exposure,” he said.

Kanungo's prescription
  • Creating overseas assets is value enhancement 
  • Acquiring oil and coal fields is strategic priority
  • Start-ups should operate from India
  • General government deficit needs to be contained 
  • Policy should encourage tapping global long-term funds

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