1. Restrictions on capital flows were enshrined in the Bretton Woods system.
2. After the breakdown of the Bretton Woods system in the early seventies, a set of strong arguments emerged in favour of free capital flows and was endorsed by IMF.
3. Starting the 1970’s, and through the 1980’s and well into the 1990’s there was a strong advocacy of full capital account convertibility by the free market proponents.
4. The first S.S.Tarapore Committee submitted its report in May 1997 and again in [2007](RBI_Group-Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf), India tried to chart a path to reach full capital account convertibility.
5. The far eastern crisis of the late 1990’s and the global financial crisis (2008) bought the debate on desirability of free capital flows back to life. It also relegated our plans to reach full capital account convertibility to the back burner
6. 1994 Madrid Declaration of the IMF - This advocacy culminated in the 1994 Madrid Declaration of the IMF to encourage the member countries to remove impediments to capital flows.
7. However, subsequent global economic developments have modified the stance and it is now admitted that capital controls can indeed be used an instrument for macroeconomic and financial stability.
8. A general agreement since that has been – “the desirability of encouraging the flow of productive capital to areas where it can be most profitably employed needs no emphasis, but there are periods when failure to manage flows have led to serious economic disruption.” These are the words of Harry Dexter White, one of the principal architects of the Bretton Woods.
9. The goalpost has now shifted from convertibility, an event to capital account liberalisation, a process.
10. As ex-Finance Minister Arun Jaitley said, "Capital Account Controls is a policy rather than a regulatory matter."
1. Thus the rules should be clear, consistent over time (secularly) and applied equally to all participants (uniformly) so that everyone knows the regulatory framework and there’s no ambiguity. [^1]
**India's Approach to Liberalisation of Capital Account**
1. The process of capital account liberalisation is guided by the principle that it should progress in tandem with reforms in the financial sector and real sector.
1. Broadly, three determining factors are important:
2. the pre-conditions for opening up of capital account
3. the cost and effectiveness of capital account restrictions and
4. monetary policy implications of an increasingly open capital account.
5. Of course, the stability and orderly conditions in the forex market remains the proximate determinant of the policies relating to capital
2. Liberalisation in this context basically meant gradually freeing up capital account transactions.
3. In India, as some of you may be aware, we have “light” capital controls ([Deepak Mohanty, 2012](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=752#:~:text=Capital%20flow%20management,belief%20and%20faith.)).
4. The policy towards capital flows is one of carefully calibrated approach.
5. The external sector liberalisation started in India with the economic liberalisation process that commenced in the early nineties – moving to a [[Exchange Rate Policy#1993|floating exchange rate]] regime and freeing up current account transactions.
1. The flexible exchange rate regime allowed the hugely overvalued Rupee to float, though somewhat managed down the years – sometimes actively and sometimes passively. So we began liberalising the capital account in 1991.
2. FERA, 1973 was replaced by the Foreign Exchange Management Act (FEMA) in 1999, which adopted a more liberalized approach to foreign exchange management.
1. The Foreign Exchange Regulation Act (FERA) was first enacted in 1947 and was replaced by FERA, 1973 which came into force on January 1, 1974.
2. During the two-and-half decades of the FERA regime, there were severe restrictions on all cross-border transactions. The current account transactions were also subject to stringent exchange control regulations, let alone capital account.
3. Before FERA, the Defence of India Act, of 1939, regulated the foreign exchange market
4. The enactment of the Foreign Exchange Management Act, 1999 codified (differentiated between capital and current account transactions) this arrangement with relatively free current account transactions (except for a negative list) and controlled capital account transactions.
5. With this, India also declared compliance with Article VIII obligations of the IMF – that there will not be any unreasonable restriction on current account transactions – good half century after the Articles was penned.
6. It recognised and discriminated between current and capital account transactions, the former unrestricted and the latter subject to regulations.
6. The capital account liberalisation is viewed as a “process” and not an “event”.
7. The path of capital account liberalisation is well calibrated but is subject to change, depending upon the evolving domestic and international economic conditions. Why is this gradualist approach?
8. We [(T Rabi, 2021)](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627) believe that the benefit of capital flows ==hinges on pace of liberalisation of the overall economy and market efficiency== and in the absence of those, unfettered capital flows could endanger financial stability.
## What justifies the approach of cautious gradualism that we have been adopting so far?
1. During 2007-08, we faced an unprecedented surge in capital inflows.
2. They effect our exchange rate management - With sharp appreciation of the Rupee, RBI had to undertake market operations, which had a liquidity impact and the fiscal cost of sterilization.
3. Several measures were taken in this milieu, such as, increase in the limits for LRS, allowing foreign companies to raise capital in India through Indian Depository Receipt (IDR), introduction of currency futures, etc.
4. But the situation changed rapidly post onset of the Global Financial Crisis (GFC).
5. After some lull during 2010-11, again post US downgrade, EU crisis, etc.
6. Do we [(Harun R. Khan, 2014)](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=14902) unwind all the decisions and measure taken during times of plenty?
1. If we do this, then our foreign exchange regulation, or any regulatory framework for that matter will not be predictable and time-consistent.
2. Investment and business is a matter of trust and investors and firms can plan and execute their strategies only if they believe that the regulatory regime will not change in the midway.
3. So, even if the external factors in today’s world change rapidly, leading to a great temptation to adjust the regulatory framework as well, RBI needs to resist it to keep the framework predictable.
7. This, in a way, justifies the approach of cautious gradualism that we have been adopting so far.
## Nature of regulatory regime for capital controls
1. **Principle-based regulation** [^1]
1. The case for a principle based regulation is founded on the fact that the ways of doing business are forever evolving and the ways of financing are evolving even faster. This is quite evident in say, infrastructure sector and the new technology start ups.
2. But a principle based regulatory framework has certain preconditions. As Julia Black states, “PBR, both formal and substantive, and in both dyadic and poly-centric relationships, is predicated, however, on extensive trust between the actors in the regulatory regime.”[2](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953#A2) If on the other hand the actors start playing games, it leads to regulatory dialectics and an intrusive and regulatory regime.
2. **Rule-based regulatory framework:**
1. It is difficult for a rule-based regulatory framework to keep pace and consequently, it is likely to handicap many socially useful projects. Moreover, in the process, it is likely to be rendered a complex maze.
3. In case of current account transactions the principle is that everything that is not specifically forbidden is allowed. In other words, all current transactions are considered as allowed unless prohibited.
4. But in case of capital account transactions the principle is that only anything that is not allowed is forbidden. In other words, all capital account transactions are considered as prohibited unless allowed. Even as we liberalise capital account more and more, the universe of restrictions shrinks and the regulatory structure will be simpler if it mentions what is prohibited rather than what is allowed.
## Pre-conditions for capital account liberalisation:
*What makes an economy ready for capital account liberalisation?*
1. price stability - growth along with low inflation
2. fiscal stability/prudence - fiscal deficit at the General Government level needs consolidation.
1. The Tarapore committee also laid fiscal stability as one of the main conditions for opening up the capital account. This was because if govt. fails to keep the deficit under control, it could trigger outflows the during the times of crisis.
2. In other words, a strict implementation of the [[OPEN FRBM Act, 2003 - The Fiscal Responsibility and Budget Management Act|FRMB]] Act is a pre-requisite for opening up the capital account.
3. and stability of the financial institutions and markets.
4. The Tarapore committee report of 2006 (also known as Tarapore Committee-II) had in its [2006](RBI_Group-Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf) report discussed about pre-conditions for fuller capital account convertibility
==In India's case, above considerations will determine the approach to regulation as capital inflows are required to serve the twin purposes of bridging the Export-Import gap and the savings-investment gap.==
Even then unless capital account liberalisation is accompanied by achievement of certain ‘thresholds’ and financial and institutional developments, the costs may far outweigh the benefits.
## Drivers of Capital Account Liberalisation:
1. As it is a process, below factors determine policies relating to capital flows, that is, how much, how fast, and in what way to liberalise capital flows. They are eclectic and country specific rather than based on universal principles.
1. the pre-conditions for opening up of capital account - *Are we ready in terms of macroeconomic strength, financial system soundness, etc.*
2. the cost and effectiveness of capital account restrictions
3. monetary policy implications of an increasingly open capital account - *If capital flows in and out freely (and suddenly), can the central bank still manage interest rates, liquidity, and exchange rate effectively?*
4. The stability and orderly conditions in the forex market will remain the closet factor affecting the policies relating to capital flows.
1. But outflows also bring volatility. Hence our tolerance for for exchange rate volatility, and particularly for any weakening of the rupee, would determine how much India can open its capital account. The two devaluations of 1966 and 1991 showed that it was India’s willingness to let the rupee adjust that drove capital account liberalisation and helped India shore up forex reserves.
2. There is no universally acceptable policy prescription relating to either trade of capital flows.
3. Still there is a possibility of specific sets of policy appropriate to a country’s idiosyncratic requirements based on both theory and empirics.
## Timeline
1. With opening up of its capital account since the early 1990s, the state of capital account in India today can be considered as the most liberalized it has ever been in its history since the late 1950s.
2. Below are just few events, but the annual reports of RBI have all of them.
3. Related Notes:
1. [ECB (Borrowings in Rupee and FCY)](ECB%20(Borrowings%20in%20Rupee%20and%20FCY).md#^3ef3d5)
2. [Inward Remittances (Private Transfers)](Inward%20Remittances%20(Private%20Transfers).md)
3. [Trade Credits](Trade%20Credits.md)
4. [Deposits and Accounts](Deposits%20and%20Accounts.md)
## 1990s
1. The far reaching economic reforms in India in the 1990s, witnessed a sharp increase in capital inflows as a result of capital account liberalisation in India and a gradual decrease in home bias in asset allocation in advanced economies.
2. Since early 1990s, India initiated several external sector reforms like progressive deregulation of the capital account.
1. The policy regime for foreign portfolio investments in India commenced in 1992 when Foreign Institutional Investors (FIIs, or, since January 2014, FPIs) were allowed to invest in domestic financial instruments, basically equity.
2. ==FPIs were given access to corporate debt markets in 1995 and to G-secs in 1997. ==
3. Thus, the FPI regime has followed the standard process of liberalising equity flows first and then gradually freeing up debt capital.
4. This note has more on [[Foreign Investment in India (Various Routes)|foreign investment in India (FPI vs FDI)]].
3. This has led to episodes of surges in capital inflows and sporadic sudden stops/reversals.
4. The capital flows have financed (and are required in _ex ante_ _sense_) our current account deficit, and ==sometimes more due to favorable interest rate differentials and promising growth outlook.==
5. This had led to a surplus in the balance of payments in several years.
6. ==These flows can be [[Capital Flows - Account & Management#Managing Capital Flows|managed]] by==
1. forex market intervention;
2. fiscal/monetary policy measures;
3. macro-prudential regulations; and
4. imposition of capital controls
7. Indian companies first started issuing GDRs in 1992 as part of financial market liberalization.
8. The FIPB was initially constituted under the Prime Minister's Office (PMO) but was transferred to DIPP in 1996.
9. The First Tarapore Committee was set up by the Reserve Bank of India in 1997 to study the implications of executing CAC in India
10. cross-currency options were available from 1993.
11. **1996**
1. Banks were permitted to fix their own position limits and Aggregate Gap Limits (AGLs) in January 1996.
2. Banks were permitted in October 1996 to provide foreign currency denominated loans to their customers out of the pool of FCNR - B deposits.
12. **1997**
1. Authorised dealers (ADs) were permitted in April 1997 to borrow from their overseas offices/correspondents as well as to invest funds in overseas money market instruments up to US $ 10 million.
2. August 1997 - FIIs are allowed to cover as a first step, their debt exposures in the forward market.
13. With a view to imparting flexibility to corporates and improving liquidity in the forward markets for periods beyond six months, ADs were also permitted to book forward cover for exporters and importers on the basis of a declaration of exposure supported by past performance and business projection provided the total forward contracts outstanding at any point of time did not exceed the average export/import turnover of the last two years.
14. Summary [^4]
1. Before 1991, India relied heavily on multilateral and bilateral assistance, ECBs (to some extent) and NRI deposits, to finance the CAD.
2. The attitude towards foreign direct investment (FDI) and portfolio investment was restrictive. In fact, the then existing regulations did not permit foreign investors to have majority ownership in Indian companies.
3. With liberalisation process, FDI is now permitted over a number of sectors where the foreign ownership can be as high as 100 per cent. The sectorial caps however continue to exist. With respect to portfolio investment, the regulators recognize certain institutions as authorized Financial Institutional Investors (FIIs) and permit them to make investments in the Indian stock market. This was a new opening. Thus the new trade regime combined with changes in the exchange rate regime and the flow of capital has completely altered the contours of Indian external sector.
4. It can be claimed that India’s balance of payments has never been as comfortable as it has been since 1992-93 except for short hiccups in 2008 and 2013. But before 1992-93, the balance of payments crisis was chronic. India had to approach IMF periodically. It went to IMF in 1981 for an Extended Fund Facility. A decade later in 1991, it had to seek assistance from IMF
<img src="https://www.rbi.org.in/scripts/images/05ARFMO10082018_CH1.jpg" width="400" style="height:auto; display:block;">
**Source** - Raj, J., Pattanaik, S., Bhattacharya, I., & Abhilasha. (2018, August). _Forex Market Operations and Liquidity Management_. Reserve Bank of India Bulletin. [Link](https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=17703)
### FEMA, 1999 - Regulations
1. The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999, (FEMA), which came into force with effect from June 1, 2000.
2. While the overarching framework has not since, there have been significant changes in the operating procedure.
3. The process has been mostly in one direction; the capital account transactions have been progressively liberalised without any significant pause or regression.
4. Under FEMA, all transactions involving foreign exchange have been classified either as capital or current account transactions. All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.
5. ==This [section](https://www.rbi.org.in/Scripts/Fema.aspx) has list of regulations (not all rules) under FEMA.==
> [!quote]
> Lok Sabha on November 19, 1999 while replying to a debate on the Foreign Exchange Management Bill.
>
> I [^2] quote _‘What we are trying to do through this legislation is to bring the entire management of foreign exchange in line with the changes which have taken place as a result of liberalization on current account. I strongly refute with all the emphasis at my command that this piece of legislation is going to help the black-marketeers, the black money operators or the hawala operators. This is a figment of the imagination of a section of the Members of this House and I refute it as I said with all the emphasis at my command. This is in terms of meeting a new situation which has come about as a result of liberalization of the foreign exchange management and the Act will only facilitate that management. That is the reason why we are introducing this legislation. We have already introduced the Prevention of Money Laundering Bill. The two legislations, I will suggest, should be considered together because they cover the entire gamut of the issues that are involved in these two pieces of legislation.’
## 2000
1. With effect from June 1, 2000, the legal framework for administration of foreign exchange transactions in India provided by the Foreign Exchange Management Act, 1999, (FEMA) came into force.
2. FEMA deals with cross-border trade and transactions, foreign exchange market and cross-border investments.
3. ==Under FEMA, all transactions involving foreign exchange have been classified either as capital or current account transactions.==
4. *All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.
5. Under FEMA, the general principle is that all current account transactions are permitted unless expressly prohibited and all Capital account transactions are prohibited unless expressly permitted. (see Sections 5 and 6 of FEMA).
6. First version of FEMA regulations were issued, including for FDI, ECBs, NRI investments.
## 2001
1. On March 02, 2001 - RBI laid legal framework for sponsorship of ADR/GDRs https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=332
1. This allowed brokers or foreign investors to purchase shares of an Indian company from the market (on behalf of investors), deposit them with a custodian in India, and the foreign depository bank could issue ADRs against those shares.
2. So this enabled ADRs to be created without a fresh issuance by the Indian company — but still with the company's cooperation (hence "sponsored").
3. Before this, that is since 1992 , the company would issue fresh shares or use existing shares, and work with a depository bank to list the ADR/GDR on a foreign exchange. Only the issuing company could initiate this; investors or brokers could not.
## 2002
1. India also introduced a **limited two-way fungibility scheme** of ADR/GDR:
1. that is purchase of Indian shares by a registered broker in India for the purpose of conversion of Indian shares into ADRs/GDRs for a foreign investor (where the shares are deposited with the Indian custodian and in exchange, the overseas depository bank issues ADRs to the foreign investor),
2. and existing ADRs/GDRs can be converted back into domestic Indian shares, maintaining a balance in capital flows.
3. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002.
4. Prior to 2002, only one-way fungibility was allowed, that is shares to ADRs only.
2. On [November 23, 2002](https://www.mea.gov.in/financial-services-faq.htm#:~:text=of%20ADR/GDR%3F-,Sponsored%20ADR/GDR,-%3A%20An%20Indian%20company) - RBI operationalized regulations allowing Indian companies to issue ADRs/GDRs vide A.P.DIR(Series) Circular No.52.
## 2003
1. The FIPB was [transferred](https://fifp.gov.in/AboutUs.aspx) to the Department of Economic Affairs; Ministry of Finance in terms of the Presidential Order dated 30.01.2003.
2. Effective July 7, 2003, RBI authorised dealers to offer foreign currency-rupee options.
## 2004
1. Liberalised Remittance Scheme [(LRS)](https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=1834) was introduced in 2004, with a limit of USD 25,000. As of 2024, the limit is USD 2,50,000.
## 2005
1. ADRs/GDRs liberalised: Indian companies allowed to raise funds abroad with more flexibility.
1. On March 02, 2001 - RBI laid legal framework for sponsorship of ADR/GDRs https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=332
2. On [November 23, 2002](https://www.mea.gov.in/financial-services-faq.htm#:~:text=of%20ADR/GDR%3F-,Sponsored%20ADR/GDR,-%3A%20An%20Indian%20company) - RBI operationalized regulations allowing Indian companies to issue ADRs/GDRs vide A.P.DIR(Series) Circular No.52.
2. In February, the FDI cap in the telecom sector for certain services, increased from 49% to 74%.
## 2006
1. In September 2006, the second committee on 'Capital account convertibility', also headed by SS Tarapore, known as Tarapore Committee II submitted its report.
2. In 2006, the LRS limit was raised to $50,000 from $25,000.
3. The [Capital account convertibility roadmap (Tarapore Committee-II)](RBI_Group-Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf)] was published, proposing phased liberalisation. With this, India tried to chart a path to reach full capital account convertibility.
## 2007
1. Unfortunately, because of unfolding of global macro-economic developments–beginning with the Asian Financial Crisis (1997–98), post-Pokhran II sanctions (1998), and later the Global Financial Crisis (2008) ranging from the post-Pokhran II global reactions to the recent global financial crisis., the implementation of the path to _full_ capital account convertibility remained on the drawing board stage.
## 2008
1. At the heart of the GFC crisis were two root causes - the build up of global imbalances and developments in the financial markets over the last two decades.
2. According to the IMF, net private financial flows to emerging and developing economies increased from US$ 254 billion in 2006 to US$ 689 billion in 2007 and then declined, at the height of the global financial crisis, to US$ 179 billion in 2008 and US$ 180 billion in 2009.
3. Global macro imbalances got built up because of the large savings and current account surpluses in China and much of Asia in the wake of the Asian Crisis in the 1990s. These were mirrored by large increases in leveraged consumption and current account deficits in the US. In short, Asia produced and America consumed.
4. Volatility in capital flows has increased significantly in the recent years particularly since 2008 crisis.
5. Capital flows management is therefore one of the biggest challenges for policy makers particularly in emerging and developing economies.
6. [Chronology of major policy announcments: April 2008 – July 2009](https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/17CMPA080809.pdf)
## 2009
1. The first consolidated [FDI Policy](https://dpiit.gov.in/policies-rules-and-acts/press-notes-fdi-circular) was released on March 31, _2010_ by DIPP (now DPIIT), improving clarity. It was a single reference point
2. LRS temporarily restricted due to balance of payment concerns post-2008 crisis.
3. December 9, 2009 - RBI decided to withdraw the existing relaxation in the all-in-cost ceilings under the approval route with effect from January 1, 2010, given the improvement in the credit market conditions and narrowing credit spreads in the international markets, thereby further tightening the rules of ECB.
## 2011
1. SEBI introduces Qualified Foreign Investor (QFI) category to broaden investor base. It was discontinued in 2014.
2. [April 29, 2011](RBI_Notification_20110429_Foreign%20investments%20in%20India%20by%20SEBI%20registered%20FIIs%20in%20other%20securities.pdf)- RBI enhanced the FII investment limit in listed non-convertible debentures / bonds, with a residual maturity of five years and above, lock-in-period of three years, and issued by Indian companies in the infrastructure sector
1. Limit was raised from USD 5 to 25 USD billion
2. With this the total limit available to FIIs for investment in listed non convertible debentures / bonds would be USD 40 billion with a sub limit of USD 25 billion for investment in listed non-convertible debentures / bonds issued by corporates in the infrastructure sector.
3. RBI also allowed SEBI registered FIIs to invest in unlisted non-convertible debentures / bonds issued by corporates in the infrastructure sector, subject to conditions mentioned in the above circular.
3. [Aug 9, 2011](RBI_Notification_20110809_Investment%20in%20the%20units%20of%20Domestic%20Mutual%20funds.pdf) - Investment in the units of Domestic Mutual funds
1. Qualified Foreign Investors as defined therein (QFIs) were allowed to invest in units of Mutual Funds debt schemes upto a limit of USD three billion within the overall limit of USD 25 billion *(mentioned in the above circular)* for FII investment in non-convertible debentures / bonds issued by Indian companies in the infrastructure sector.
4. [Nov 03, 2011](RBI_Notificaiton_20111103_Foreign%20investment%20in%20India%20by%20SEBI%20registered%20FIIs%20in%20other%20securities.pdf) - FIIs were allowed to invest in non-convertible debentures / bonds issued by NBFCs categorized as ‘Infrastructure Finance Companies’(IFCs) by the Reserve Bank of India within the overall limit of USD 25 billion, 1-year lock-in, and original maturity *(changed from residual to original)* of 5 years and above
5. [FDI Policy 2011](https://dpiit.gov.in/policies-rules-and-acts/press-notes-fdi-circular) - FDI caps revised in sectors like insurance, retail, defence
6. [July 11, 2011](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6619&Mode=0#ann) - Hedging facilities for non-resident entities to facilitate Rupee Trade
1. In order to facilitate greater use of Indian Rupee in trade transactions, as announced in the Monetary Policy Statement for the year 2011-12 (para 85), it was decided to allow non-resident importers and exporters to hedge their currency risk in respect of exports from and imports to India, invoiced in Indian Rupees, with AD Category I banks in India.
7. [October 22, 2012](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=7637&Mode=0) - FIIs to **approach any** AD Category I bank for hedging their currency risk on the market value of entire investment in equity and/or debt in India.
## 2012
1. [[RBI_Press Release_120625_RBI announces Further Liberalisation Measures for Capital Account Transactions.pdf|June 25, 2012]] - RBI announces Further Liberalisation Measures for Capital Account Transactions
1. RBI allow Indian companies to avail of ECBs for repayment of Rupee loan(s) availed of from the domestic banking system and / or for fresh Rupee capital expenditure, under the approval route, subject to them satisfying the following conditions:-
2. [June 25, 2012](RBI_Notification_20120625_External%20Commercial%20Borrowings%20(ECB)%20–%20Repayment%20of%20Rupee%20loans.pdf) - ==Framework for ECB (after infra in Sept-2011 and power sector in April-2012) ==*(only for manufacturing and infra sector)* for repayment of outstanding rupee loans, and towards capital expenditure) under the approval route was allowed, along with [other measures](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=26714) for further liberalisation of capital account transactions was further relaxed/modified.
3. [June 25, 2012](RBI_Notification_20120625_Foreign%20investment%20in%20India%20by%20SEBI%20registered%20FIIs%20in%20Government%20securities%20and%20SEBI%20registered%20FIIs%20and%20QFIs%20in%20infrastructure%20debt.pdf)
1. The existing limit of USD 15 billion for FII investment in Government securities stands enhanced with immediate effect by USD 5 billion to USD 20 billion
2. The sub-limit of USD 5 billion (with condition of residual maturity of 5 years) was increased to USD 10 billion (with condition of residual maturity of the instrument at the time of first purchase by FIIs to be at least 3 years).
3. QFIs can invest in those MF schemes that hold at least 25 per cent of their assets (either in debt or equity or both) in the infrastructure sector under the [current](RBI_Notification_20110809_Investment%20in%20the%20units%20of%20Domestic%20Mutual%20funds.pdf) USD 3 billion sub-limit for investment in mutual funds related to infrastructure
## 2013
1. FPI route announced, which replaced FII/QFI categories.
2. The first [[Foreign Investment in India (Various Routes)#Masala Bonds|Masala Bonds]] (rupee-denominated bonds issued abroad by Indian entities) were issued in October 2013 by the IFC, an arm of World Bank, for infrastructure projects in India.
3. In [2013](Non-Monetary%20Gold%20and%20the%20RBI.md#2013), several measures were taken to reduce India's gold imports, due to rising current account deficit.
## 2014
1. SEBI, through notification dated January 7, 2014, merged the existing categories of Foreign Institutional Investors (FIIs), their sub-accounts, and Qualified Foreign Investors (QFIs) into a single class of investors called [[Foreign Investment in India (Various Routes)#1. FPI (Debt & Equity)- Foreign Portfolio Investments|Foreign Portfolio Investors (FPIs)]] through the SEBI (Foreign Portfolio Investors) Regulations, 2014 It was effective from June 1, 2014, and it simplified the regulatory framework for foreign portfolio investment in India. It provided a uniform set of rules and a single window clearance system through Designated Depository Participants-DDP.
2. FDI limit increased in defence (49%) and insurance (49%).
3. On September 25, 2014, Make in India initiative was launched, encouraging foreign manufacturing investment.
## 2015
1. FDI cap in insurance increased to 49%.
2. [Startup India](https://www.startupindia.gov.in/) campaign launched, improving foreign access to Indian startups.
3. FDI policy consolidated into single document for ease of reference.
## 2016
1. On [January 1, 2016](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10261&Mode=0), FEM (Foreign Currency Accounts by a person Resident in India) Regulations, 2000 was repealed and replaced by FEM (Foreign Currency Accounts by a person Resident in India) [Regulations]((https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12916&Mode=0), 2015 [^3] with effect from January 21, 2016.
2. FDI in e-commerce clarified, allowing 100% in marketplace model, but restricting inventory model.
3. On [24 June 2016](https://dpiit.gov.in/policies-rules-and-acts/press-notes-fdi-circular), India introduced another comprehensive FDI policy, where FDI in civil aviation, pharma, and defence were liberalised further.
4. FEM (Deposit) Regulations, 2000 was repealed and replaced by [FEM (Deposit) Regulations, 2016](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10325&Mode=0) with effect from April 1, 2016.
1. In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts.
## 2017
1. The Foreign Investment Promotion Board (FIPB) was abolished on ==May 24, 2017== and replaced by the _Foreign Investment Facilitation Portal (FIFP_). It was announced by Finance Minister Arun Jaitley in the 2017-18 budget speech. The aim was to streamline the [[Foreign Investment in India (Various Routes)#4. FDI (Equity, in Rupee) - Foreign Direct Investment|FDI]] approval process and promote ease of doing business in India.
2. Startups allowed to raise ECBs under relaxed norms.
3. Foreign Exchange Management (Transfer or Issue of Security to a Person Resident Outside India) Regulations, [2017]( https://incometaxindia.gov.in/Documents/Provisions%20for%20NR/FEM-Transfer-or-Issue-of-Security-by-a-Person-Resident-Outside-India-Regulations-2017.htm) replaces the 2000 version vide notification NO.FEMA.20(R)/2017-RB/GSR 1374(E), DATED 7-11-2017.
4. FDI in retail and construction further liberalised.
5. [February 2, 2017](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10849&Mode=0) - It was decided to allow NRIs to access the exchange traded currency derivatives market to hedge the currency risk arising out of their investments in India under FEMA, 1999.
>[!info] [Box X.5 Approaches to Capital Account Liberalisation: OECD and IMF](RBI_Annual%20Report_2017.pdf#page=179&selection=78,0,78,58) in RBI's Annual Report 2017
## 2018
1. FPIs allowed to invest in municipal bonds.
2. Single brand retail allowed 100% FDI under automatic route.
3. LRS limit increased to USD 250,000.
4. Since the 1990s, the broad approach towards permitting foreign direct investment has been through a dual route, i.e., automatic and approval, with the ambit of automatic route progressively enlarged to almost all the sectors, coupled with higher sectoral caps stipulated for such investments.
5. RBI [permitted](https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11222&fn=6&Mode=0) persons resident in India and FPIs to take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges
6. September 7, 2018 - The outward remittance services by non-bank entities through AD (category I) banks in India has been modified for overseas education by enhancing the limit to USD 10,000 per transaction.
**In respect of NRI deposits, some modulation of inflows is exercised through specification of interest rate ceilings and maturity requirements.**
## 2019
1. RBI made following rules/regulations, called Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, [2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0), relating to mode of payment and reporting requirements for investment in India by a person resident outside India.
2. FEM (Non-Debt Instruments) Rules, 2019, *notified on October 17, 2019*
1. Investment made by foreign portfolio investor along with its investor group (hereinafter referred to as ‘FPI’) was permitted up to 10 percent of the total paid-up equity capital on a fully diluted basis.
2. In case of breach of the prescribed limit, FPI have the option of divesting their holdings or reclassifying such holdings as FDI.
3. FPI regulations updated (FPI Regulations, 2019): Simplified and merged previous frameworks.
4. [March 1, 2019](RBI_Press%20Release_20190301_RBI%20introduces%20the%20Voluntary%20Retention%20Route%20for%20Investments%20by%20Foreign%20Portfolio%20Investors%20(FPIs)%20-%20Voluntary%20Retention%20Route.pdf) - The VRR [scheme](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11492&Mode=0) was introduced for foreign portfolio investments in govt. and corporate debt.
5. [Jan 16, 2019]((https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11456) - ==New External Commercial Borrowings (ECB) Policy== was announced
## 2020
1. [April 17, 2020](DPIIT_20200417_Review%20of%20Foreign%20Direct%20Investment%20(FDI).pdf) - FDI policy revised to require prior government approval for countries sharing land border with India (notably China).
## 2021
1. [June 14, 2021](DPIIT_20210614_Review%20of%20Foreign%20Direct%20Investment%20(FDI)%20policy%20on%20Insurance%20Sector.pdf) - FDI limit under automatic route in insurance sector hiked to 74%
## 2022
1. Aug 22, 2022 - A new [overseas Investments](External%20-%20Overseas%20Investments.md#Overseas%20Investments) regime was announced with <span style="background-color: #fff9ae">Overseas Investment Rules & Regulations, 2022 </span>
2. [Feb 10, 2022](RBI_Press%20Release_20220210_RBI%20reopens%20allotment%20of%20investment%20limit%20under%20the%20Voluntary%20Retention%20Route%20for%20Investments%20by%20Foreign%20Portfolio%20Investors.pdf) - The overall investment limit under VRR was reopened and increased to INR 2.5 trillion.
3. [July 6, 2022](RBI_Press%20Release_20220706_Liberalisation%20of%20Forex%20Flows%20(Revised).pdf) - RBI announced measures for Liberalisation of Forex Flows (Revised).
4. [July 11, 2022](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12358&Mode=0), RBI allowed AD bank in India to open Special Rupee Vostro Accounts [(SRVA)](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3373)of correspondent bank/s of the partner trading country to facilitate INR trade settlements. Rupee Vostro accounts were not for cross-border transactions and allowed payments under Rupee Drawing Arrangements to exchange houses for financing of trade only upto ₹2 lakh.
5. [August 1, 2022](RBI_Notification_20220801_External%20Commercial%20Borrowings%20(ECB)%20Policy%20–%20Liberalisation%20Measures.pdf) - Announced on July 6, 2022, liberalisation measures on ECB policy were operationalised
1. In mid-2022, the Indian Rupee was facing aggressive depreciation pressure against a surging US Dollar. To quickly draw foreign currency into the country, the RBI temporarily doubled the ECB automatic route borrowing limit from USD 750 million to USD 1.5 billion per financial year and raised the all-in-cost ceiling by 100 basis points. Because it was a temporary shock absorber, the RBI chose not to extend it into 2023.
## 2023
1. [Aug 5, 2023](https://www.sebi.gov.in/reports-and-statistics/reports/aug-2023/consultation-paper-on-permitting-increased-participation-of-non-resident-indians-nris-and-overseas-citizens-of-india-ocis-into-sebi-registered-foreign-portfolio-investors-fpis-based-out-of-int-_75915.html) - SEBI Consultation Paper on Permitting Increased Participation of NRIs and OCIs into SEBI Registered FPIs Based out of IFSCs was released, which formally outlined the mechanism to scale aggregate NRI/OCI contributions up to 100% via IFSC in GIFT City.
## 2024
1. March 4, 2024 - DPIIT issued [press note](GoI_2024_Review%20of%20Foreign%20Direct%20Investment%20(FDI)%20Policy%20on%20Space%20Sector.pdf) on 100% FDI in space sector
2. [June 27 2024](https://www.sebi.gov.in/legal/circulars/jun-2024/participation-by-non-resident-indians-nris-overseas-citizens-of-india-ocis-and-resident-indian-ri-individuals-in-sebi-registered-fpis-based-in-international-financial-services-centres-in-india_84449.html) - SEBI allowed up to 100% _investment_ in _IFSC_-registered FPIs by NRIs/OCIs/RIIs.
3. November 2024 - RBI issued [guidelines](https://www.rbi.org.in/Scripts/NotificationUser.aspx/NotificationUser.aspx?Id=12749) for reclassification of Foreign Portfolio Investment to Foreign Direct Investment (FDI).
1. After re-classification, the entire investment of the FPI in the Indian company shall be considered as FDI and shall continue to be treated as FDI even if the investment falls to a level below ten percent subsequently.
2. Post reclassification of foreign portfolio investment to FDI, the said investment shall be governed by Schedule I to the Rules.
## 2025
1. [May 8, 2025](RBI_Notification_20250508_Investments%20by%20Foreign%20Portfolio%20Investors%20in%20Corporate%20Debt%20Securities%20through%20the%20General%20Route%20–%20Relaxations.pdf) - RBI decided to withdraw the requirement for investments by FPIs in corporate debt securities to comply with the short-term investment limit and the concentration limit.
## 2026
1. [Feb 9, 2026](RBI_Notification_20260209_Foreign%20Exchange%20Management%20(Borrowing%20and%20Lending)%20(First%20Amendment)%20Regulations,%202026.pdf) - Effective from Feb 16, 2026, RBI notified FEM(Borrowing and Lending) (First Amendment) Regulations, 2026 and rationalised the ECB framework by expansion of eligible borrower and recognised lender base, rationalisation of borrowing limits and restrictions on average maturity period, removal of restrictions on the cost of borrowing for ECBs, review of end-use restrictions and simplification of reporting requirements.
1. The per-borrower limit under the automatic route was raised to the higher of USD 1 billion in outstanding borrowings or 300% of the borrower's net worth (up from the previous uniform USD 750 million cap)
# References
1. India Code. The Fiscal Responsibility And Budget Management Act, 2003. [Link](https://www.indiacode.nic.in/bitstream/123456789/2064/1/a2003-39.pdf)
2. RBI. (2006.). Committee on Fuller Capital Account Convertibility (Chairman-Shri S.S. Tarapore). [pdf](RBI_Report:Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf)
3. RBI. (August, 1999). Asian Financial crisis. Issues and Lessons. RBI Staff Studies. [Link](https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/1999RBIStaffVol61999_August1999.PDF) | [[RBI_Research_RBI Staff Studies_199908_Asian Financial crisis-Issues and Lessons .pdf|pdf]]
4. Duvvuri Subbarao. (May 11, 2010). Volatility in Capital Flows: Some Perspectives - Comments of Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the High-level Conference on ‘The International Monetary System’ jointly organised by the Swiss National Bank and the IMF in Zurich on May 11, 2010 | [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504)
5. G Padmanabhan (ex-Executive Director, RBI). (2015, April 3). *Musings of a Departing Forex Market Regulator* \[Speech\]. Foreign Exchange Dealers Association of India (FEDAI) Conference at Brussels. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953) | [pdf](RBI_Speech_20150406_Musings%20of%20a%20Departing%20Forex%20Market%20Regulator_G%20Padmanabhan_06042015.pdf)
6. T Rabi Sankar (2021, Oct 14). *India’s Capital Account Management – An assessment* \[Speech\]. Fifth Foreign Exchange Dealers’ Association of India (FEDAI) Annual Day on October 14th, 2021. Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627)
7. FIFP. *Historical Background of FIPB*. [Link](https://fifp.gov.in/AboutUs.aspx). Retrieved on August, 2025.
8. [More References](Capital%20Flows%20-%20Account%20&%20Management.md#References)
### Others
1. Rangarajan, C. (2015, March 13). _Issues in India’s external sector_ (5th Raja Chelliah Memorial Lecture, Raja Chelliah Memorial Lecture Series). National Institute of Public Finance and Policy (An autonomous research institute under the Ministry of Finance). [Link](https://www.nipfp.org.in/cms-index-page/publications/raja-chelliah-lectures/) | [pdf](NIPFP_20150313_Issues%20in%20India’s%20external%20sector_C%20Rangarajan.pdf)
# Related
1. Foreign Investment In India - [[Foreign Investment in India (Various Routes)|FPI vs FDI]]
2. [ECB (Borrowings in Rupee and FCY)](ECB%20(Borrowings%20in%20Rupee%20and%20FCY).md)
3. [Inward Remittances (Private Transfers)](Inward%20Remittances%20(Private%20Transfers).md)
4. [Trade Credits](Trade%20Credits.md)
5. [Deposits and Accounts](Deposits%20and%20Accounts.md)
6. [External - Overseas Investments](External%20-%20Overseas%20Investments.md)
1. [Liberalised Remittance Scheme (LRS)](Liberalised%20Remittance%20Scheme%20(LRS).md)
[^1]: Shri. G Padmanabhan (ex-Executive Director, RBI). (2015, April 3). *Musings of a Departing Forex Market Regulator* \[Speech\]. Foreign Exchange Dealers Association of India (FEDAI) Conference at Brussels. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953) | [pdf](RBI_Speech_20150406_Musings%20of%20a%20Departing%20Forex%20Market%20Regulator_G%20Padmanabhan_06042015.pdf)
[^2]: Harun R Khan (ex-Deputy Governor of RBI. (2016, June 11). *Foreign Exchange Market & Cross-border Transactions: Some Random Reflections* \[Speech\]. 11th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI), Hong Kong. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1008)| [pdf](RBI_Speeches_20160621_RBI_Speech_20160611_Foreign%20Exchange%20Market%20&%20Cross-border%20Transactions-%20Some%20Random%20Reflections.pdf)
[^3]: NOTIFICATION [NO.FEMA 10(R)/2015-RB]/GSR 96(E), DATED 21-1-2016
[^4]: Rangarajan, C. (2015, March 13). _Issues in India’s external sector_ (5th Raja Chelliah Memorial Lecture, Raja Chelliah Memorial Lecture Series). National Institute of Public Finance and Policy (An autonomous research institute under the Ministry of Finance). [Link](https://www.nipfp.org.in/cms-index-page/publications/raja-chelliah-lectures/) | [pdf](NIPFP_20150313_Issues%20in%20India’s%20external%20sector_C%20Rangarajan.pdf)