Indian is moving fast towards full capital account convertibility as almost all debt securities would be available through the liberal Fully Accessible Route overtime and the accelerated integration of the domestic and offshore currency markets that has delivered efficiency, said RBI deputy governor T Rabi Shankar.
There is a need to review the Liberalised Remittance Scheme with limits based on the need due to the evolving start up scene and the need for higher studies, he said.
” There is an effort to liberalize FPI debt flows further with the introduction of the Fully Accessible Route (FAR) which places no limit on non-resident investment in specified benchmark securities” said Rabi Shankar at the Foreign Exchange Dealers’ Association of India (FEDAI) Annual Day. ” The move is unambiguously towards an eventual unfettered access for non-residents into Government securities”.
Efforts to get India included under global bond indexes and the complementary move towards placing G-secs under global custodians, once implemented, is expected to encourage debt flows in future.
The integration of the onshore and offshore markets for domestic currency or interest rates also helped in usher in efficiency in these markets. ” For instance,the non-deliverable forwards (NDF)-onshore spreads have substantially narrowed after allowing Indian banks into the NDF space” Rabi Shankar said. ” As onshore and offshore financial markets get integrated, it should be ensured that price discovery in the domestic markets is efficient lest flows move to the offshore segment.
But he also warned that with the Fully Accessible Route, over time the entire G-sec issuance would be eligible for non-resident investment. But substantial debt holdings might make India vulnerable to the risk of sudden reversals. ” Since this channel was permitted in the context of inclusion of India’s G-secs in global bond indices, there is a natural safety mechanism as index investors are unlikely to indulge in sudden reversals. It may need to be considered, from a macroprudential perspective, whether FAR should be linked to index inclusion”.
Rabi Shankar also called for a review of the liberalised remmittances scheme (LRS) which currently allows a resident Indian to remit upto $ 250,000 per person per year for eligible current account transactions. ” As the LRS Scheme has operated for some time, there may be a need to review it keeping in mind the changing requirements such as higher education for the youth, requirement of start-ups etc. There might even be a case for reviewing whether the limit can remain uniform or can be linked to some economic variable for inpiduals” he said.