1. Capital Account Management (CAM)– Indian Experience Reserve Bank of India 1

2. Forex Regime in India Flexible exchange rate regime Fully convertible on Current Account since 1994 Capital account convertibility is considered as a “process” and not an “event” 2

3. Concomitants for Capital Account Convertibility GFD to be 3% GDP (5.2%) Revenue surplus of 1% of GDP (3.9%) Institutional mechanism for monetary policy i.e. MPC Inflation rates need to converge towards internationally acceptable levels (6.1%) Banking Sector - promotion of competitive efficiency, prudential regulatory and supervisory policies, accounting standards, risk management systems, etc Good corporate governance Financial markets fully integrated and widened

4. Capital account liberalization Fairly liberalized regime, more so for non- residents and domestic corporates The financial integration i.e. the ratio of gross current account and capital account flows to GDP has gone up from 33% in 1990-91 to 44% in 1998-99; 112% in 2008-09; and further to 115% in 2012-13 4

5. CAD and Capital Flows 2006/07 2007/08 2008/09 2009/10 2010-11 2011-12 2012-13 CAD (% of GDP) 1.0 1.4 2.5 2.8 2.8 4.2 4.8 Net Capital flows (% of GDP) 4.7 9.5 0.6 3.8 3.7 3.6 4.8 Rupee appreciation (+) depreciation (-) vis-à-vis US$ 4.6 11.3 (14.2) 3.3 3.8 (5) (13.6)

6. Indian Context: Two episodes Episode I - 2004-08 : Surge in inflows Episode II - 2009 (Post-Lehman), 2011 (Post US downgrade) and 2013 (proposed QE tapering) – experienced sudden stops and reversal

7. Broad principles of Capital Account Management 1) Preference hierarchy –Nature of flows Equity over Debt FDI over Portfolio Debt for capital formation Long term over short term – Agents Non-residents Residents – Corporates - Financial Sector - Individuals 7

8. Broad principles of Capital Account Management 2) Pursued active capital account management Monetary policy measures Prudential measures Capital control measures Market measures

9. Broad principles of Capital Account Management 3) Prudential measures Higher risk weight and prudential limits on exposure to sensitive sectors, such as commercial real estate and capital market Restrictions on externalization of balance sheets by financial institutions Credit risk intermediation of overseas exposures not allowed Unhedged currency exposures of corporates closely monitored and factored in risk assessment and pricing 9

10. Broad principles of Capital Account Management Regulatory driven prudential norms on ALM mismatches Open position in currencies tightly regulated Conservative regulations on securitization Capital adequacy norms above the Basel minimum 10

11. Broad principles of Capital Account Management 4) Capital control measures Predictable regulatory environment on equity flows Corporate debt flows, both short-term and long- term are regulated through price, quantity, maturity and end-use Portfolio debt flows regulated through quantity and maturity Exchange rate volatility partially managed through tweaking regulations on dynamic hedging, margins and positions 11

12. Broad principles of Capital Account Management Debt flows masquerading as equity i.e. instruments with embedded options and advances restricted FDI in the real estate sector under strict regime Capital flight is regulated tightly. Recently, the limits on remittances by corporates and individuals have been reduced 12

13. Broad principles of Capital Account Management 5)Market intervention Sterilized intervention during too much capital flows- a situation of private benefit and public cost; but indirect cost to be reckoned Now intervention only to smoothen volatility Wide menu of hedging instruments Off-shore trading of INR – implications for exchange rate management Too much appreciation or depreciation – implications on agents Special swap window by the Reserve Bank of India 13

14. Challenges Low interest rate environment in some jurisdictions and flow of carry trade speculative capital Need a common approach and international consensus; competitive control regimes 14

15. Economic Inequality Priority sector advances Initiatives on financial inclusion and financial literacy JLGs/SHGs empowering women Rural Self Employment Training Institutes – skill building and credit linkage Guarantee scheme for lending to SMEs Interest rate subvention to agriculture and exports Sector specific refinance or apex refinancing institutions 15

16. Thank You 16