Banks must be ready for a fully convertible capital account: RBI Dy Governor

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Reserve Bank of India (RBI) Deputy Governor T Rabi Shankar on Thursday said the country and its banks must be prepared to meet the challenges of full capital account convertibility as foreign investors fully access to the Indian debt market.

“The rate of change in the convertibility of capital will only increase…. With that comes the responsibility of ensuring that these flows are managed effectively with the right combination of capital flow measures, macro-prudential measures and market intervention, ”said the vice-governor in his speech. opening at the Fifth Foreign Currency Brokers Association of India (FEDAI) annual day.

Under the Fully Accessible Route (FAR), foreigners can have full access to certain specified titles, at 5 years, 10 years and 30 years to start. The idea is to include the bonds in global indices where foreign investors can fully invest in these bonds.

Over time, the entire issuance of G-sec (government securities) would be eligible for investment by non-residents, according to Rabi Shankar.

“While the experience of other countries suggests that non-residents are unlikely to hold a significant portion of the outstanding shares, large debt holdings could make India vulnerable to the risk of sudden reversals,” he said. he declared.

While index investors are unlikely to engage in sudden reversals, “it may be necessary to examine, from a macroprudential perspective, whether the DAF should be linked to inclusion in the index”, Rabi Shankar said.

Going forward, the liberalized transfer regime, under which an Indian can send up to $ 250,000 abroad each fiscal year, will need to be reviewed. The vice governor said it might even be necessary to determine whether the limit can remain uniform or can be linked to an economic variable for individuals.

Currency convertibility will also lead to the integration of financial markets. Over time, with increased convertibility, the onshore and offshore currency and interest rate markets will be linked. The RBI has decided to do this in the interest rate derivatives segment, while the Rupee Undeliverable Futures (NDF) market is also making an effort in this direction.

After Indian banks entered the NDF space, the gap narrowed and foreigners will eventually hold rupee resources if local bonds are available in foreign markets.

“We now need to determine whether India is ready to allow these non-residents to hold rupee accounts. This will be an important first step in the internationalization of the rupee and, therefore, should be carefully considered, ”said the vice-governor, adding that with larger offshore transactions, an appropriate mechanism for information flow will be. necessary.

With greater integration, it is important that prices in the internal market are transparent and beneficial to all. But individuals and small businesses are denied good prices by banks. The deputy governor criticized lenders for not giving enough importance to the retail platform for foreign exchange trading because it is not in their best interests to do so.

“In the age of technology, it might not really be possible to avoid superior technology for a while. There should be a debate on the use of the platform and banks should make an effort to give it a fair trial, ”said Rabi Shankar.

Convertibility of the capital account will come with some associated risks and challenges, and market participants, especially banks, “will need to be prepared to deal with business process changes and the global risks associated with convertibility of capital,” Rabi said. Shankar.

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