T Rabi Sankar, Deputy Governor, Reserve Bank of India (RBI), during the annual day of 5th Foreign Exchange Dealers' Association of India (FEDAI), on Friday, said there is an effort to liberalise FPI debt flows further, with the introduction of the Fully Accessible Route (FAR). This, he said, places no limit on non-resident investment in specified benchmark securities.
He said over time, virtually all securities will fall under the FAR category, and the move is unambiguously towards 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, will encourage debt flows in future," he said.
He said with the fully accessible route, over time the entire G-sec issuance would be eligible for non-resident investment. "While the experience of other countries suggests 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," he said.
Since this channel was permitted in the context of the inclusion of India's G-secs in global bond indices, he said, 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," he added.
He also said as the LRS (Liberalised Remittance 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, requirements 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 individuals," he said.
Sankar said allowing Indian banks access to NDF (non-deliverable forward) markets for the rupee is also consistent with this objective. "As G-secs get held by global custodians and traded abroad more and more non-residents get to hold rupee assets and take rupee exposure," he said.
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As per Sankar, 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.
He said India is also 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 the table.
He said market participants, particularly banks, will have to prepare themselves to manage the business process changes and the global risks associated with capital convertibility.
"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.
Sankar said the "quality of the dish - that is, the efficiency with which investment needs of the country are met - is up to how well authorised dealers and other intermediaries adjust to the increasingly fuller capital account convertibility".
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