Mumbai: The Reserve Financial institution of India (RBI) deputy governor T. Rabi Sankar on Thursday stated that market contributors, significantly home banks, must be ready to handle challenges that come up as India strikes additional into liberalisation of capital account convertibility, with overseas traders getting extra entry to the debt market.
Sankar additionally hinted on the subsequent few issues on the central financial institution’s thoughts equivalent to the character of index inclusion, the necessity to assessment the liberalized remittance scheme (LRS) and permitting non-resident to carry rupee accounts. Consultants, nevertheless, stated an even bigger problem for the RBI can be managing the ‘impossible trinity’ that’s alternate charge, free capital flows and unbiased financial coverage.
“Market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility,” stated Sankar whereas addressing the Overseas Trade Sellers’ Associ-ation of India’s assembly.
Sankar stated there’s an effort to liberalise FPI debt flows additional with the introduction of the Absolutely Accessible Route (FAR) which locations no restrict on non-resident funding in specified benchmark securities. Efforts to get India included beneath international bond indexes and the complementary transfer in the direction of inserting G-secs beneath international custodians, as soon as carried out, will encourage debt flows sooner or later. He stated with the Absolutely Accessible Route, over time all the G-sec issuance can be eligible for non-resident funding. “While experience of other countries suggest that non-residents are unlikely to hold a major portion of outstanding stock, substantial debt holdings might make India vulnerable to the risk of sudden reversals.”
Sankar stated that from a macroprudential perspective, it must be thought-about whether or not FAR needs to be linked to index inclusion. Equally, there may even be a case for reviewing whether or not the restrict beneath the LRS can stay uniform or will be linked to some financial variable for people.
G. Ananth Narayan, affiliate professor at SP Jain Institute of Administration and Analysis, stated, “RBI has progressed quite a bit with the FAR securities, efforts to include India debt into global indices, towards settling Indian bonds on global clearing platform like Euroclear and integrating offshore NDF market with the onshore market. Now, the deputy governor has hinted at the next few things on RBI’s mind, including the nature of index inclusion, the need to review the LRS scheme, and considering allowing non-resident to hold rupee accounts. These steps are very welcome and progressive and come with their own challenges.”
“One thing that the deputy governor did not mention is that we have an independent inflation targeting monetary policy framework and there is an ‘impossible trinity’ which says that you cannot have an independent monetary policy framework, a stable currency market and free capital flows at the same time. As India progresses on fuller capital convertibility, the impossible trinity can become a bigger issue of debate,” he added.
Ashutosh Khajuria, ED, Federal Financial institution stated, “The RBI continues to remain cautious on debt capital flows.”