Main Note - [Foreign Exchange Management](Foreign%20Exchange%20Management.md)
## Capital Account
1. The balance of payments (BOP) of a country records all economic transactions of a country (that is, of its individuals, businesses and governments) with the rest of the world during a defined period, usually one year.
2. These transactions are broadly divided into two heads – current account and capital account.
1. The current account covers exports and imports of goods and services, factor income and unilateral transfers.
2. ==The capital account records the net change in foreign assets and liabilities held by a country.==
3. Capital inflows [[RBI_Image_Balance of Payments (BoP) table from the Annual Report of 2024-25.png|(BoP table in Annual Report 2025)]] are in the form of: ^f47115
1. Private capital flows:
1. FPI (debt, equity),
2. FDI (equity) and
3. other investments like loans (ECB, short-term loans like [trade credits](https://rbi.org.in/scripts/PublicationsView.aspx?Id=18950)),
1. Export credit - trade credits are for pre- and post-shipment credit (both Indian Rupee and foreign currency, but BoP counts FCY) for exporters which are intended to provide short-term working capital finance,
2. Import credit - importers have access to foreign trade credit through channels such as buyers’ credit, suppliers’ credit and trade finance guarantees
4. NRI deposits (FCNR(B), NR(E)RA, and NRO from NRIs)*,
1. Other items under "Currency and Deposits" would be Non-Resident deposits (other than NRIs), vostro balance (foreign banks’ money with Indian banks) and Nostro overdrafts (banks overdrawn abroad) of commercial banks, etc.
5. and other changes in assets & liabilities , ~~not inward remittances~~
2. [[Govt_Budget 2025-2026_250201_External Assistance.pdf|External assistance]] to the government of India in form of ^b264c4
1. aid receipts (non-repayable grants like cash grants, commodity aid) from agencies like GFATM (treated as current account receipt),
2. loans (repayable)
1. bilateral loans from countries like Germany, Japan, Russia, France, South Korea,
2. loans from multilateral agencies such as World Bank group (IBRD, IDA), ADB, NDB, EIB, AIIB, IFAD
3. It is added to the [[WSS - Weekly Forex Reserves#1.1 Foreign Currency Assets (FCA)|FCA]] component of forex reserves. With the government having no foreign currency account, the external aid received by the Government comes directly to the reserves and the RBI releases the required rupee funds. Hence, this particular source of supply of foreign exchange e.g. external aid does not go into the market and to that extent does not reflect itself in the true determination of the value of the rupee.
3. Other items in capital account like
1. SDR allocation
2. leads and lags ( mismatch in customs data and bank data like delayed export receipts, advance payments against imports),
3. quota payment to IMF, India's subscription to International institution, quota payments to IMF,
4. net changes in funds held abroad of RBI - movement in balances of foreign central banks and international institutions like IBRD, IDA, ADB, IFC, IFAD etc. maintained with RBI as well as movement in balances held abroad by the Embassies of India.
5. advances received pending issue of shares under FDI, capital receipts not included elsewhere,
6. rupee debt service (interest is classified under current account, and principal repayments on account of old civilian and non-civilian debt in respect of Rupee Payment Area (RPA)/Rupee area countries are included in capital account).
4. ==Related Note - [External Debt-India](External%20Debt-India.md)==
5. Types of capital flows
4. **Types of flow and hierarchy of RBI's preference for different capital flows:**
1. First, capital flows particularly for the real sector (part of the economy that produces goods and services) will always have priority over flows into the financial sector.
1. Huge investments are also required for the physical and social infrastructure sector, but the latter ones have their own challenges in terms of long and uncertain execution period, long payback period, etc
2. For the real sector, there is almost complete freedom as far as capital account transactions are concerned.
2. <span style="background-color: #f1ffae">Second, equity related capital inflows will have preference over debt inflows.</span>
1. **Equity:** A capital inflow in the nature of equity poses little stability issues (except in socially or economically sensitive sectors where foreign ownership may not be considered appropriate).
2. Within the equity flows, direct investment flows will be preferred to portfolio flows.
3. A capital inflow in the nature of equity poses little stability issues (except in socially or economically sensitive sectors where foreign ownership may not be considered appropriate).
4. The restrictions in FDI mostly pertain to sectoral caps in a few sectors deriving more from strategic and social considerations rather than strictly economic ones.
5. Portfolio flows or portfolio investment (equity) is almost completely open, other than just sectoral caps, company-wise limits, restricted sectors, and requirement of registration, and in the stipulation that the issue or transfer of securities should be at fair value.
6. The investment should be in equity securities. Some leeway is provided through hybrid securities – fully and compulsorily convertible preference shares and debentures. The other hybrid securities such as partially convertible debentures, optionally convertible debentures or equities with embedded optionality are not treated at par with equities and hence not permitted as instruments for making foreign direct investment.
7. In fact, the unrestricted access to foreign portfolio investors has brought great buoyancy to the equity markets, but it also sometimes leads one to wonder whether we are selling our equities cheap.
8. **Debt:** As debt flows are concerned, preference for long term debt and rupee-denominated debt – whether bilaterally contracted (like loans) or through marketable securities – shall continue.
1. Debt contracts can lead to build up of significant risks at the firm and more importantly at the systemic level. History stands witness to this proposition. ==Whether it is Latin America or East Asian countries or Greece in recent times, financial and economic stability were rooted in borrowing a foreign currency or in a currency over which the country had no control.==
2. there are various restrictions both at the aggregate levels as well as at micro level.
3. the regime for regulation of external debt has been progressively modified to cater to the emerging resource needs of the economy.
3. Overseas investment by Indian enterprise is also fairly permissive.
4. There is also emergence of a new class of investors: venture capital and private equity funds.
1. Anecdotal reports seem to suggest that in the last few years before 2019, investment by these funds constitute about 35-40% of the FDI inflows.
2. VC and PE funds act as the mediator between long term investors like pension funds, insurance companies, sovereign funds, trusts, endowments etc.
3. These investments have different structural and behavioural characteristics.
4. The current regime permits wide latitude of freedom to [[Foreign Investment in India (Various Routes)#3. Foreign Venture Capital Investment - FVCI (Debt or Equity, in Rupee)|VC]] investors in select sectors perceived to be economically important but risky for normal FDI.
5. Innovative debt or hybrid instruments — especially for important sectors like infrastructure, renewable energy, health, education, and social development has also been RBI's focus
5. The world today is flush with long-term savings in the nature of pension funds and corpus of insurance companies, our policy regime need to be nimble and accommodative enough to direct these to productive ventures in India
>[Box 2: COVID-19 and Debt Relief from Multilateral Agencies](GoI_Reports_202309_India's%20External%20Debt%20-%20A%20Status%20Report_2022-23.pdf#page=40&selection=12,0,16,5) in India's External Debt - A Status Report_2022-23
## Capital Outflows/Overseas Direct Investment
1. The focus on [[External - Overseas Investments|capital outflows]] has understandably been far less given that India’s priority is to attract foreign capital to fund its savings gap.
## Capital Account & its Convertibility
1. Convertibility refers to the ability to convert domestic currency into foreign currencies and vice versa to make payments for balance of payments transactions.
2. <span style="background-color: #ecf9ee"> Current account convertibility <a href="https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627"> (Rabi Sankar, 2021)</a> is the ability or freedom to convert domestic currency for current account transactions while capital account convertibility is the ability or freedom to convert domestic currency for capital account transactions.</span>
3. In other words, capital account convertibility [G Padmanabhan, 2015](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf#page=3&selection=38,0,45,35) would mean that there is no restriction on conversion of the domestic currency into a foreign currency to enable a resident to acquire any foreign asset or on conversion of a foreign currency to the domestic currency to enable a non-resident to acquire a domestic asset.
4. The Tarapore Committee (2006), for instance, defined capital account convertibility as the "freedom to convert local financial assets into foreign financial assets and vice versa."
1. Capital account of the balance of payments comprises a summary of cross border transactions in assets. Assets in the context of international transactions mean investment assets: equity, debt, immovable property or any combination or hybrid of these.
2. Thus capital account convertibility would mean that there is no restriction on conversion of the domestic currency into a foreign currency to enable a resident to acquire any foreign asset or on conversion of a foreign currency to the domestic currency to enable a non-resident to acquire a domestic asset.
1. Assets are diverse. If a foreign company sets up an Indian subsidiary, say, to manufacture automobiles or aircrafts that is also capital account transaction and so is if a hedge fund buys treasury bills to book a profit out of expected movement in interest rates.
2. Similarly capital flows may finance a metro project or fuel a real estate boom.
5. It is different from internationalisation of INR.
6. The movement of the Indian rupee is largely influenced by the capital flow movements rather than traditional determinants like trade flows.
7. They can be broadly classified into *Debt-Creating and Non-Debt Creating flows:*
1. Non-Debt flows: Equity flows under foreign direct investment (FDI) and foreign portfolio investments constitute the major forms of non-debt creating capital flows to India.
2. Debt Creating Flows: Debt flows under [[Foreign Investment in India (Various Routes)|FPI, ECB or FVCI]].
8. **Statute:**
1. The statute provides that the Reserve Bank (and when the 2015 amendment to FEMA, 1999 is notified, the Central Government in some classes of transactions) will regulate which capital account transactions are permitted and to what extent and subject to what conditions.
2. Partly because of this construct of the statutory provisions but mostly because of the evolving macroeconomic conditions during the past two decades, majority of the policy actions have related to the capital account.
3. The changes constitute mostly rationalisation and consolidation rather than any significant change in stance.
9. AEs like US, UK, Japan, and European countries, the currency is fully convertible for current account and capital account transactions.
>1. [Box 4.1 Tarapore Committee I (1997)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=130&selection=42,0,44,27) in History of The Reserve Bank of India (1997-2008)-Volume V
>2. [Foreign Exchange Market and Management of the Capital Account](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=126&selection=8,0,8,12) in History of The Reserve Bank of India (1997-2008)-Volume V
> [!quote]
> Anyone anywhere in the world with an exposure to the Rupee should be able to enter into a derivative transaction to hedge the currency risk, and the transaction should be in the on-shore market. Beyond that, we have been endeavouring to expand the set of derivative transactions. We are not ready yet to allow unfettered trading of the rupee for pure speculation.
> -[Is India ready for full Capital Account Convertibility? by G Padmanabhan, 2015](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf)
## Liberalisation of Capital Account in India
1. [[Capital Account - Liberalisation|Link]]
## Why Capital Convertibility or Capital Flows?
Here, we discuss about conversion of capital inflows. Given the scarcity of resources, there is not much govt. focus on [[External - Overseas Investments|investments abroad by resident Indians]].
### Arguments For Capital flows
1. Capital flows aid growth by providing external capital ([Subbarao, 2010](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504)) to sustain an excess of investment over domestic savings.
2. **Free capital mobility, or internationalisation of capital markets:**
1. Free global capital flows bring about better and more efficient allocation of the global pool of savings to the more productive uses. This has been considered the most important contribution of capital account convertibility, though there are reservations on this too.
2. It broadening of the investor base for recipient country's (developing country) financial assets. In other words, the developing countries enjoy free access to global capital markets, and that increases available investible resources and thus domestic savings. So surely, capital flows are important to meet the investment needs of EMEs.
3. This leads to an improved liquidity in financial markets, potentially developing nascent financial markets, and creating positive pressures for market infrastructure and market practices.
4. It can also reduce the marginal cost of capital, that is the borrowing costs, both for the government and the corporates.
5. All of the above finally accelerates investment and growth.
6. Thus, this factor is commonly recognised as an engine of global growth.
3. **Portfolio Diversification**:
1. By affording the opportunity of using the world market, an open capital account permits both savers and investors to diversify their portfolios to maximize returns and minimize risks, in developed as well as developing countries.
2. Thus they facilitate better risk allocation and enhance global liquidity (OECD, 2017).
4. **More Accountability & Financial Discipline:**
1. Because the feasibility of capital account convertibility rests on sound macroeconomic policy, it creates a sort of commitment for the country concerned to ensure better macroeconomic management, lest it is punished by the investors. ==As Rudiger Dornbusch puts it, “The capital market fulfils an important supervisory function over economic policy”.==
5. **Short-term pains needed to reap long-term gains:**
1. One may argue that such risks are the short-term pains needed to reap long-term gains (Kaminsky and others, 2008)[2](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627#F2), there is now a wider acceptance that benefits of internationalisation are a mixed blessing and that there is a nuanced trade-off between growth and crisis risk. Such awareness has led to policy focus on three fronts.
2. Ways to mitigate this risk:
1. A sound macroeconomic fundamentals, a well developed financial system and a sound market infrastructure, including efficient markets for funding and risk transfer.
2. Countries need to develop appropriate tools to manage the volume and composition of capital inflows and macro prudential tools.
3. ==Different types of capital flows carry different risks – some are riskier than others.==
1. The agreed hierarchy of capital flows is that foreign direct investment is the least risky, followed by equity investment (less than 10%), followed by debt capital.
2. While [[Foreign Investment in India (Various Routes)|FDI]] *(an investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company*) is seen to contribute to long-run growth, portfolio equity (less than 10% stake) gives a shorter run boost.
3. Debt flows, while necessary, are susceptible to be volatile. *Understandably, the focus of capital flow regulations, and macro-prudential regulations, has been debt flows.*
6. In fact, the Interim Committee of the IMF ([G Padmanabhan, 2015](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=956)) in its meeting in Hong Kong in September 1997, adopted a statement on liberalisation of capital accounts that essentially sought to incorporate unrestricted capital account transactions into the Articles of the IMF. *This was after the outbreak of the Asian Crisis; such was the force of the idea of capital account convertibility.*
7. Another most obvious argument is that all developed countries are capital account convertible; hence this is an inevitable destiny of the developing countries in their path to development.
### Arguments Against Capital flows
1. **They are pro-cyclical and they complicate macroeconomic management.**
*Managed (limited movement) exchange rate, intervention and hence liquidity dominates*
1. If inflows come during an upturn, RBI intervenes and injects rupees, liquidity increases overheating the economy. Here the exchange rate may move a little but intervention dominates. So the liquidity effect is more than the exchange-rate cooling effect.
2. During a downturn, capital outflows can tighten liquidity and deepen the slump.
*Exchange-rate channel dominates, flexible intervention only to smoothen volatility*
If the capital flows responds to the domestic cycle, however, the impact of capital flows on the exchange rate can be stabilizing for the cycle [[IGIDR_Research_201808_Evaluating India's exchange rate regime under global shocks_Ashima Goyal.pdf#page=27&selection=2,0,9,84|(Ashima Goyal, 2018)]].
1. Inflows during an upturn appreciate the exchange rate, reducing exports, import-led inflation, reducing growth thus contributing to stabilization.
2. Outflows during a downturn depreciate the exchange rate which supports exports and output, helping economy to recover
If the capital flows does not respond to the domestic cycle, however, the impact of capital flows on the exchange rate can be de-stabilizing for the cycle.
3. Large risk-on inflows of capital during a downturn can appreciate the currency, as happened during 2017, potentially working against recovery as RBI may intervene, but even if RBI buys dollars (partial absorption), the appreciation may still happen;
4. Outflows during an upturn may cause depreciation and overheating; RBI may respond by selling dollars and tightening liquidity (and sometimes raising policy rates to widen interest rate differentials and attract capital or prevent outflows) to prevent excessive depreciation. These policy responses can cool down the upturn and stabilize growth.
2. **Impossible Trinity** - An open capital account interferes with the simultaneous management of a fixed/managed exchange rate peg and an independent monetary policy – a phenomenon familiarly known as the ‘Impossible Trinity’.
1. **Indian context of 1997-1998 was not really a trilemma:**
1. India was gradually opening up to capital mobility, which was limited, after C. Rangarajan took charge as the RBI governor.
2. But exchange rate was not fixed, but it was also totally market-determined as there were interventions by RBI.
3. So India did not face the trilemma in a strong form.
4. Major issue - But lack of holdings of govt. paper to conduct OMOs to sterilise capital flows of 1996-1997 pushed the inflation by end of 1997 and into 1998.
5. The US Federal Reserve had also raised rates six times, from 3% at the start of the year to 6% by early 1995 and in March 1997, following which the value of dollar had appreciated.
6. Given high inflation in India and rising rates in US, a rate hike by India was not like trilemma but the right thing to do.
7. However C. Rangarajan had later admitted that it may not be possible to achieve both the goals with a single action.
2. Capital flow management has been perceived to be challenging particularly in the context of Mundell’s ‘impossible trinity’ of fixed exchange rate, independent monetary policy and open capital account ([Deepak Mohanty, 2012](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=752#:~:text=Capital%20flow%20management,belief%20and%20faith.)) . All the three cannot be pursued simultaneously, and at least one should be sacrificed. Which one has to be sacrificed? Well, it depends upon country-specific situation and available policy options.
3. Capital account openness and independent monetary policy framework could lead to sacrifice of exchange rate management. This flexible exchange rate which can be disorderly and volatile. Thus the volatile capital flows can therefore lead to extreme volatility in the exchange rate and large departures from its equilibrium value.
4. This reminds me [(Mohanty, 2012)](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13831) of an old adage in Hindu mythology, which is somewhat similar to impossible trinity: that the idols of Brahma (the creator), Vishnu (the preserver), and Shiva (the destroyer) cannot be kept under the same roof! Among three, who should be kept out? There is no rule or convention. It is left to the choice of individual households and their belief and faith.
3. **Asset Bubbles (Overheating):**
1. Problems arise when the flows are largely in excess of the economy’s absorptive capacity.
2. Large speculative flows in ‘search for yield’ typically go into investment in assets leading to rapid and destabilizing build up of asset prices.
3. The east [Asian crisis of 1997](https://www.federalreservehistory.org/essays/asian-financial-crisisis) is an example of this.
4. **Loss of export competitiveness:**
1. It can also lead to bubble in the value of domestic currency. It can strengthen the exchange rate which may not be in consonance with the fundamentals of the real economy, for example, the appreciation of the Rupee in 2007-08 was caused by large capital inflows attracted by a buoyant and promising economy but affected the export sector adversely.
2. Also if, at the same time, the trading partner or countries for the same export market have fixed exchange rate (that is, the currency is kept artificially cheap), then it can further hurt the export competitiveness.
5. **Abrupt Cessation, Exit or Variation (Vulnerability to crisis)**:
1. We now live in a globalized world. However, the various currency and banking crises experienced over the last few decades have simultaneously highlighted the costs and risks of internationalisation, such as exposure to global shocks, credit and asset bubbles, and exchange rate volatility.
2. Domestic shocks may also arise from adverse macroeconomic factors like deteriorating fiscal conditions, inflationary pressures, balance of payments stress, or other structural imbalances.
3. Apart from these factors, capital flows are also sensitive to volatility stemming from information asymmetries, herd behaviour, and episodes of panic.
1. In such events, when investors cease to supply capital or exit abruptly in a herd, stock and bond prices fall. When investors repatriate their funds, the exchange rate depreciates..
2. A fall in value of domestic currency can raise the cost of imports and to the extent that import constitutes articles essential for investment and growth, can act as a retarding factor. It also heightens refinancing risk for foreign-currency borrowings.
3. In case of India, large part of imports comprises crude, fertilizer, capital goods and intermediates, an increase in the cost of imports due to depreciation of currency can hurt growth and employment and affect the fiscal balance.
4. *In short, exchange rate movements due to capital flows which are more than absorptive capacity of the economy, can either way can affect us adversely. Appreciation could hurt our exports and depreciation would make the imports expensive.*
5. Thus cessation or sharp reversal of the large and persistent (speculative) capital flows and can potentially jeopardize financial stability.
1. The crisis in several Latin American countries 1990’s had already pointed out the destabilizing effect of capital account openness.
2. The Asian Crisis of (July 1997-December 1998) also put the idea of full capital account liberalisation on the back burner.
3. Further, the recent crisis of 2008 has also led to led to renewed rethinking on the desirability of capital flows.
4. Flows are also prone to volatilities derived from information asymmetries, herd behaviour, panics etc, which far different from the fundamental macroeconomic factors.
5. Portfolio flows dominated by FPIs have showed large swings having implications for liquidity, besides complicating monetary and exchange rate management.
6. More frequent changes in the direction and variation in capital flows have been a matter of concern in the context of a widening current account deficit. *RBI's policy response to handle capital flows quite often had to switch mode quickly from addressing excessive inflows to sudden outflows.*
7. Capital flows have different intentions and hence cannot be viewed as a homogeneous phenomenon with identical economic consequences. They can be conceptually classified into two broad categories:
1. Those that imply long term engagement without any incentive to exit at every provocation – Any kind of speculative flow is volatile by nature, and hence they can impair the orderly functioning of the financial markets.
2. Those that are motivated by dis-interested profit – those that buy at every low and sell at every high, as it were.
3. ==Hence capital flows makes us most vulnerable to crisis if the flows create debt liabilities (or if flows were arising from indiscriminate borrowing).==
8. Another example of liberal capital flows is the plan to increase investment limits under the Fully Accessible Route ([[Foreign Investment in India (Various Routes)#^48d541|FAR Route in G-Secs]]) to NRIs, that is over a time the entire G-sec issuance would be eligible for non-resident investment.
1. *Risk:* 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.
2. *Risk Mitigation:* Since this channel was permitted in the context of inclusion of India’s G-secs in global bond indices, there is a natural safety mechanism as index investors are unlikely to indulge in sudden reversals. *It may need to be considered as a precaution from a macro-prudential perspective, whether FAR should be linked to index inclusion.*
9. But even when India does not have fully open capital account, it has experienced large volatility in capital flows (like between 2006 to 2010).
6. **Intervention and Sterilisation** - Should the central bank intervene to stabilize the forex market in times of capital outflows, the supply of dollars and the resultant absorption of domestic liquidity can tighten the liquidity conditions and affect the money markets. It has to then sterilise its intervention by re-supplying the liquidity.
7. **Contagious** - Thus, speculative flows affect all financial markets - the securities markets, the forex market, the money market and the credit market. The contagion spreads from one market to another rapidly, and if not contained, these swift developments can *threaten financial stability and lead to output and employment losses.*
1. In a way, increased globalisation has brought to the fore the vulnerability to contagion effects.
8. EMEs respond to this adverse macro impact of volatile capital flows through a variety of policy actions.
9. **Capital Account Convertibility is necessary but not sufficient condition for global savings:** One of the most important contribution of capital account convertibility, that is, its role in better allocation of global savings but there are reservations too this. Capital movement is guided by considerations such as **tax savings** which improve the returns to the investor but does not contribute to increased productivity.
10. **Open Capital Account does not lead to more capital flows:** Mere open capital account, that is too freely allow convertibility of foreign currency to domestic currency, does not constitute sufficient conditions to ensure capital flows into a country
11. **Capital Flows does not guarantee growth:** Also mere capital flows, in absence of appropriate institutional framework in the receiving country, does not contribute to growth and welfare.
1. On the other hand, it has been argued that free capital accounts were not necessary for the phenomenal growth recorded by countries in the diverse parts of the world.
2. As ==Jagdish Bhagwati== observes in his celebrated 1998 paper, “After all, China and Japan, different in politics and sociology as well as historical experience, have registered remarkable growth rates. Western Europe’s return to prosperity was also achieved without capital account convertibility.”
3. Elsewhere in the same paper he remarks, “Substantial gains (from capital account convertibility) have been asserted, not demonstrated, and most of the payoff can be obtained by direct equity investment.” (emphasis added), a theme to which I shall return shortly.
12. **Controls on capital outflows in times of currency and banking crisis** is now part of the accepted wisdom.
1. The imposition of controls on capital outflows by one country can have significant negative externality; it can generate a flight of capital from other similarly situated countries for fear of capital controls there too.
2. When the Asian crisis broke out, some economists advocated imposition of temporary controls on outflows as a policy tool to steer the affected economies out of the crisis.
3. In September 2008, when Iceland faced a similar crisis, controls on outflows implemented through stringent exchange control regulations were a key component of the policy package.
4. It may also be noted that India has been using capital controls to effectively manage the capital inflows and outflows.
5. As noted above measures to restrict capital outflows often have to be very strict, and intense, or else they are unlikely to be effective in preventing capital outflows when fear of a sharp fall of asset prices and resulting instability of financial institutions grips investors. Such intense controls on outflows then send a "bad signal" which can discourage foreign investments in later years. Even if these controls are withdrawn in short-time due to a quick reversal in the forex market conditions, decision making by economic agents can be adversely affected due to policy uncertainty for businesses, foreign investors etc.
6. So the need for controls on outflows in times of crisis can be reduced by putting controls on inflows in first place.
13. **Requirement for Convertibility:**
1. A key aspect of currency convertibility is integration of financial markets.
2. Over time, it is essential that two markets – onshore and offshore - for domestic currency or interest rates cannot exist with efficiency. ==With increased convertibility, these markets need to be linked. ==
3. An effort has already commenced in the interest rate derivative segment. Allowing Indian banks access to NDF 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. These measures are already seeing the desired results - for instance, NDF-onshore spreads have substantially narrowed after allowing Indian banks into the NDF space ([Chart 2](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627#C2), see [Annex](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20627#AN1)).
4. ==We need to now consider whether India is ready to allow such non-residents to hold Rupee accounts==. This will be an important early step in internationalisation of the Rupee and, therefore, needs to be carefully considered. Further, there is a need to consider a proper mechanism for information flow so that exchange and interest rate management can continue to be effective in an environment of larger offshore transactions.
>[!tip]
**'Is India ready for full Capital Account Convertibility?', G Padmanabhan, 2015:**
14. It is generally accepted that sooner or later all countries have to be there and the question is **when, how and at what pace.**
>2. Are there preconditions to be created so that the benefits of capital account convertibility outweigh the costs, as Tarapore Committee advocated or,
>3. Should we rush to it in anticipation of the promised land and leave it to the financial markets to discipline economic management into good behaviour?
>4. Is the slow progress to capital account convertibility “a case of undesirable procrastination or wisely heeding the precautionary principle” as Arvind Subramanian puts it?
>Further Reading:
>1. [Box I.20 Foreign Investment Flows to India](RBI_Annual%20Report_2006.pdf#page=112&selection=3,0,4,33) in RBI' Annual Report-2006
>2. [Box II.6.2 Capital Flows and Foreign Exchange Reserves: An Analytical Perspective on Absorptive Capacity of the Domestic Economy](RBI_Annual%20Report_2020.pdf#page=103&selection=15,0,15,59) in RBI's Annual Report - 2020
# Managing Capital Inflows
^e14c93
1. Here we discuss about ways to manage capital inflows
2. EMs with flexible exchange rate regimes require additional instruments to manage the large capital flows.
3. The optimal policy response to capital inflows [(Rangarajan, 1997)](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=231#:~:text=The%20optimal%20policy%20response%20to%20capital%20inflows) is very much a function of the anticipated persistence of capital inflows. The design of policy depends upon the expectation whether the inflow of capital is temporary or is expected to continue. A temporary increase in inflow and perceived as such by the public, which may lead to a temporary real appreciation of the exchange rate, is unlikely to have major effects. Problems, however, arise if the inflow is temporary, but the public expects the inflow to continue. But, in real life, nobody knows with confidence, what is temporary, how temporary it is, and what the public perception is, and indeed how temporary the public perception is! [^3]
4. Capital flows are important to meet the investment needs of EMEs.
5. Problems arise when:
1. the flows are largely in excess of the economy’s absorptive capacity and also
1. when they are highly speculative in nature.
6. Few ways EMEs have responded to high inflows:
## 1. Exchange Rate Option
1. The first option is to do nothing (exchange rate option) in which case the exchange rate will appreciate.
1. When capital inflows are large, this can lead to currency appreciation *unrelated to fundamentals* and trigger a 'Dutch Disease' syndrome-*good news in one sector but bad consequences for others*.
2. Experience has shown that a flexible exchange rate system is prone to overshooting, and this has engendered the 'fear of floating' among many countries. If a central bank does not buy/sell a currency that is not freely traded internationally [[IGIDR_Research_201808_Evaluating India's exchange rate regime under global shocks_Ashima Goyal.pdf|(Ashima Goyal, 2018)]], sharp spikes occur.
3. Also large swings can attract the attention of speculators.
4. But there can also be some benefits of some volatility:
1. But some amount of exchange rate flexibility deepens markets and encourages hedging.
2. It discourages one-way, risk-free speculative capital inflows against the central bank - If the RBI lets the rupee fluctuate within a reasonably wide band (say ±5-10%), investors cannot assume that the RBI will always step in to protect them. and thus if the exchange rate moves against them, they can face the risk of losses.
3. It is high volatility that hurts the real sector.
## 2. Intervention (Reserve Accumulation)
1. The second is to allow the flows to come in but [[Forex Market Interventions and Sterilisation#^b0e905|intervene]] in the forex market (reserve accumulation option).
1. This is done to dampen disorderly movements of the exchange rate.
2. This will result in accumulation of foreign exchange reserves and release of additional liquidity into the system.
3. If left unsterilized, the additional liquidity so generated in the system will have potential inflationary implications.
4. Typically central banks have sterilized the flows, either partly or fully, using a variety of [[Forex Market Interventions and Sterilisation#^7f55eb|tools]].
5. In theory, each of these tools holds out the prospect of achieving the same effect as open market operations.
1. **Fallout of Sterilisation:**
1. Such intervention would prevent the domestic money market interest rates from falling which would attract more inflows and thus actually accentuate appreciation pressure, the problem that was sought to be contained in the first place.
2. **Cost of Intervention:**
1. In the case of EMEs, intervention may also entail large quasi-fiscal costs if the domestic assets yield higher returns than the foreign exchange reserves. This is also called the carrying cost of reserves.
3. **Benefits of Intervention:**
1. Forex reserves help in preserving financial stability in the face of outflows.
2. In fact, besides being an intrinsic good, foreign exchange reserves confer several other important advantages such as automaticity, fungibility and usage in both crisis prevention and crisis resolution.
3. They act as means of self-insurance, given the potential for rapid outflows and the associated liquidity risks.
1. <span style="background-color: #ecf9ee">While evaluating the level of reserves and the quantum of self insurance, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity. </span>
2. India falls in the latter category. Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses.
3. It helped EMEs which had built up reserves to weather the GFC crisis more effectively.
4. High level of reserves help to maintain market confidence as measured by lower spreads on credit default swaps.
5. Thus, it helps to blunt the penetration of the crisis in these economies.
4. **Fallout of Intervention:**
1. Accumulation of reserves has been criticized as being costly and inefficient and also as contributing to global imbalances.
2. To wean EMEs away from self insurance, international financial institutions like the IMF have recently come up with revised instruments such as (i)flexible credit line, high access precautionary arrangements.
3. There were also cases of regional swap arrangements during the recent crisis.
4. ==It is not yet clear if such external safety-nets can fully substitute for national level self-insurance in terms of speed, effectiveness and autonomy.==
## 3. Deploying controls on Inflows
1. This includes:
1. cap on external debt ( or may be linking them to level of forex reserves),
2. limits based on investment [[Foreign Investment in India (Various Routes)#^d96bc5|horizon]] (categories are Long-Term FPIs and General FPIs), preference to long term flows over short-term flows and non-debt flows over debt flows,
3. temporary restrictions like taxes on certain types of risky (hot money) flows,
4. higher withholding (deductions of tax directly at the source before the funds are remitted to a foreign investor) taxes on investments in the country by non-residents,
5. discouraging or monitoring non-resident (NRI) deposits through an interest rate ceiling.
6. higher reserve requirements on deposits maintained by non-residents (in local currency),
7. reducing regulatory gap across FPI vs ECB (that is using relaxed FPI rules to bypass strict ECB rules) if the aim is to reduce risky short‑term external debt,
8. moderating ECB flows under both the automatic and approval routes by interest rate ceilings (a price variable) and those under the automatic route through an additional ceiling on total quantity (a quantity variable).
So India has used both quantity and price variables to manage capital inflows.
2. Also caps could be based on the stock rather than only flows (that is amount of investment allowed in a year). [^4]
1. If based only on flows, it would restrict capital flows but still eventually building up a very large stock of short‑term external liabilities.
2. If based on caps, it would restrict or cap the outstanding level of external debt (at any time) as a % of total debt/total external debt/total outstanding debt of G-Secs or rather more resilient metrics like total forex reserves/GDP. But it is unclear as to the choice of denominator here. The ratio is important because the real risk is rollover of the external debt, and not the mere size of it.
3. Example - The limits/caps for foreign investors in G‑Secs and SDLs is a % of outstanding stock along with a cap in total flow for the year.
3. Experience in deploying controls on inflows has been mixed.
1. Protagonists of controls have argued that capital controls are distortionary, difficult to implement, easy to evade, and that they become ineffective fairly quickly and entail negative externalities, can be viewed as unfavorably by investors, and risk of being associated with a possibility of controls on capital outflows
2. On the other hand, proponents of capital controls contend that controls are desirable because:
1. they preserve monetary policy autonomy,
2. save sterilization costs,
3. tilt the composition of foreign liabilities toward long-term maturities, and ensure macroeconomic and financial stability,
4. reduce the need for controls on outflows in times of crisis because of controls on inflows in first place
3. ==The challenge for policy makers is to design and implement inflow controls where the cost of compliance is lower than the cost of evasion.==
4. Premature capital account opening hurts more than it helps.
1. Asian crisis-1997 vs GFC-2008
2. Capital controls were a central issue during the Asian crisis, but the orthodox view that ‘controls are not desirable’ largely survived the crisis.
3. Capital controls are now once again a central issue, as the global financial crisis of 2008, across emerging economies, a rough correlation between the extent of openness of the capital account and the extent of adverse impact of the crisis.
4. Surely, this should not be read as the denouncement of open capital account, but a powerful demonstration of the tenet that premature capital account opening hurts more than it helps.
5. **Tobin tax**
1. Taxing capital inflows is yet another form of dissuading/discouraging volatile and excessive foreign capital.
2. After the global financial crisis, Tobin-type taxes were discussed widely as a form of capital control. Several countries experimented with variants of Tobin tax to limit large and short-term capital inflows.
3. The argument in favour of such taxes is that they lower the net return on domestic financial assets, thereby reducing inflows and stabilising the exchange rate, and and consequently curtails the intensity of “boom-bust” cycles caused by international capital flows.
4. However, Tobin taxes have been criticized because:
1. the tax can be circumvented/evaded easily through modern financial instruments like derivatives (as FIIs can take exposure or speculate on INR by taking positions in derivatives like NDF or forex swaps;
2. they may reduce market liquidity,
3. they increase the cost of capital (for the FCY borrowers), and
4. to remain effective the tax must be broadened constantly, which may create inefficiencies.
5. <span style="background-color:#fefaf3;">The RBI had considered a Tobin-type tax in the past but decided against implementation due to these limitations.</span>
6. The efficacy of a Tobin type tax remains a debatable issue.
7. Brazil's (2010–2012) [IOF](https://www.bis.org/publ/bppdf/bispap73f.pdf) (Tax on Financial Operations) is an example of this.
6. **Unremunerated Reserve Requirement (URR)**
1. Variable deposit requirements (like between 20-30%) in the nature of interest free deposits with the central bank, like Chile's URR (or *Encaje*) in 1990, is another form of discouraging capital inflows.
2. This measure, while it reduces the capital inflows and the need for costly sterilisation through sale of bonds, may result in misallocation of resources and reduce the facility to borrowers to take advantage of lower international interest rates
7. Thus macro‑prudential/taxes on short‑term external debt should be the first-line of defense. With this risky external borrowing will be contained. Given that smaller, safer stock of short‑term debt, the same reserves can act as an effective buffer against residual shocks/sudden stops/retrenchment.
8. IMF published in February 2010[2](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504#N2) has referred to certain _‘circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows_’.
9. The [IMF’s Global Financial Stability Report (April 2010)](https://www.imf.org/en/Publications/GFSR/Issues/2016/12/31/Global-Financial-Stability-Report-April-2010-Meeting-New-Challenges-to-Stability-and-23343) has gone further into this issue and observes that capital controls are reasonable instruments in the 'toolkit' of developing/EME economies facing volatile capital flows. The World Bank and the Asian Development Bank too have echoed the view that capital controls may be advisable, indeed inevitable, in certain circumstances.
## 4. Liberalising capital outflows
1. Liberalising [[External - Overseas Investments|overseas]] investments can reduce net capital inflows.
## 5. Raising reserve requirements (CRR) on incremental non-resident (NRI) deposits
1. RBI has used CRR successfully in the past, to stem/discourage inflows.
2. On April 1997, RBI had announced the imposition of a 10% Cash Reserve Ratio (CRR) on all incremental non-resident (NRI) deposits over the level outstanding on April 11, 1997 which lead to the deceleration in the growth of foreign currency deposits during the financial year of 1997-98.
3. This measure, while it reduces the need for costly sterilisation through sale of bonds, may result in misallocation of resources and reduce the facility to borrowers to take advantage of lower international interest rates
>1. [Capital Flow Management with Multiple Instruments](Viral%20V%20Acharya_Paper_20171214_Capital%20Flow%20Management%20with%20Multiple%20Instruments.pdf), by Viral V. Acharya Arvind Krishnamurthy, October 31, 2017.
>2. [Annex 1A: Measures to Manage Capital Inflows](RBI_Speeches_20080201_Capital%20Flows%20to%20India.pdf#page=29&selection=0,0,0,44) in paper presentation titled "Capital Flows to India" by Rakesh Mohan, Deputy Governor, Reserve Bank of India on February 1, 2008 at the annual meeting of Deputy Governors held at the Bank for International Settlements (BIS), Basel
Capital flows are thus a complex phenomenon having both benefits and costs. Their role in enhancing the domestic investment and the potential to trigger financial crisis can be seen as the two sides of the same coin.
## Trends in Capital Flows
1. 1992-95 - Foreign investment which was less than $0.6 billion in 1992-93. It surged to $4.1 billion in 1993-94 and is expected to be well over $5 billion in 1994-95
2. **2000-2005:**
1. In the aftermath of the Asian crises, it was widely perceived, supported by academic research and commentators, that large reserves were needed by emerging market economies (EMEs) to withstand any crisis and, to some extent, it was a reflection of the lack of confidence in the international financial architecture.
2. As a result, the recent episode of reserve accumulation has been on a much higher scale and more prolonged than was seen during the early 1990s.
3. As reported by the Bank for International Settlements (BIS), the EMEs, during 2000 and 2005, accumulated reserves at an annual rate of US $ 250 billion (or 3.5 per cent of their annual combined GDP), which was almost five times higher than the level seen in the early 1990s. The bulk of the reserve accumulation was concentrated in Asia with countries like China, Korea, India, Malaysia and Taiwan (China) witnessing large increases, while countries in Latin America and Central Europe had a fairly modest increase in reserves during this period. Lately, many oil-exporting countries have also seen a large increase in their reserves.
3. India has experienced both ‘floods’ and ‘sudden stops’ of capital flows.
4. 2006 to 2010 - "Trends in India’s External Sector" in the speech titled Volatility in Capital Flows: Some Perspectives, by D. Subbarao. [^5]
1. Net capital flows to India increased from as low as US$ 7 billion in 1990-91 to US$ 45 billion in 2006-07, and further to US$ 107 billion during 2007-08, the year just before the crisis.
2. They dropped to as low as US$ 7 billion in 2008-09 at the height of the crisis.
3. Capital flows are estimated to have recovered to around US$ 50 billion in 2009-10.
5. **2017**
1. a stable nominal rupee and large interest differentials attracted high volume capital inflows into debt.
# Capital Flows and Forex Reserves
Few reading resources here:
1. Viral V. Acharya. (Dec 14, 2017). *Global spillovers: Managing capital flows and forex reserves*. Keynote address at the NSE-NYU Conference on Indian Financial Markets, Mumbai, India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1051) | [[RBI_Speech_20171214_Global spillovers- Managing capital flows and forex reserves.pdf|pdf]]
2. Article titled *Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications* in the Monthly Bulletin of April 2022 [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly_Bulletin_Article_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)
3. Data - [Chart 1: Net Capital Flows to India](https://www.rbi.org.in/scripts/images/14WPS21092022_C1.jpg) from 1991Q2 to 2019Q4
# Related Notes
1. [[Capital Flows - Account & Management]]
2. [[Capital Account - Liberalisation]]
3. [[Foreign Investment in India (Various Routes)]]
4. [[External - Overseas Investments]]
5. [[Foreign Exchange Management]]
# References
### [[Speeches & Media Interactions|Speeches]]
1. Y.V. Reddy. (1997, August 15). *Exchange Rate Management : Dilemmas* \[Inaugural Address\]. XI<sup>th</sup> National Assembly Forex Association of India at Hotel Cidade De Goa. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=231) | [pdf](RBI_Speech_19970815_Exchange%20Rate%20Management%20-%20Dilemmas_Y.V.Reddy%20.pdf)
2. Y. V. Reddy (Nov 23, 1998). *Managing capital flows*. Seminar at Asia/Pacific Research Center, Stanford University, USA. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=6)
3. RBI. (2001, September). [Report](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1123) on Monitoring of Non-Debt Flows in India 2001
4. Rakesh Mohan. (June 14, 2007). Capital Account Liberalisation and Conduct of Monetary Policy: The Indian Experience. Paper Presented by Dr. Rakesh Mohan. (Paper presented at an International Monetary Seminar organised by Banque de France on Globalisation, Inflation and Financial Markets in Paris on June 14, 2007). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=340)
5. Rakesh Mohan. (Feb 01, 2008). *Capital Flows to India*. (Paper presented by Deputy Governor, Reserve Bank of India on February 1, 2008 at the annual meeting of Deputy Governors held at the Bank for International Settlements, Basel.). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=406)
6. Gopinath, S Deputy Governor (2011, Feb 18). *Approach to Capital Account Management-Shifting Contours by Shyamala Gopinath*. Annual Conference of the Foreign Exchange Dealers’ Association of India (FEDAI), Thimpu. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=12007)
7. Duvvuri Subbarao. (May 11, 2010). *Volatility in capital flows: Some perspectives*. High-level Conference on ‘The International Monetary System’, Swiss National Bank and the International Monetary Fund, Zurich. Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504)
8. Harun R Khan. (Sep 05, 2012). *Turmoil in Global Economy: The Indian Perspectives*. (Based on the address delivered by Shri Harun R Khan, Deputy Governor, Reserve Bank of India at the All India Conference 2012 on ”Waves of Change: Ocean of Opportunities” organized by the Institute of Chartered Accountants of India in Bhubaneswar on August 18, 2012). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=728)
9. Deepak Mohanty. (Nov, 2012). *Global Capital Flows and the Indian Economy: Opportunities and Challenges* by Deepak Mohanty. RBI Bulletin. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=12957)
10. Deepak Mohanty. (Nov, 2012). *Managing Capital Flows.* RBI-ADB Conference on Managing Capital Flows at Mumbai.
11. Harun R Khan (ex-Deputy Governor of RBI). (May 12, 2014). *Regulating Capital Account: Some Thoughts*. 9th Annual Conference of the Foreign Exchange Dealers Association of India (FEDAI). Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=14902)
12. G Padmanabhan (ex-Executive Director, RBI). (April 3, 2015). 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)
13. G. Padmanabhan (May 18, 2015). Is India ready for full Capital Account Convertibility? \[Speech\]. MSNM Besant Institute of PG Management Studies, Mangalore. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=956) | [pdf](RBI_Speeches_20150518_Is%20India%20ready%20for%20full%20Capital%20Account%20Convertibility?.pdf)
14. Harun R Khan. (Mar 16, 2016). Global Economic Turmoil: Impact on Indian Economy and the Way Forward. (Shri Harun R Khan, Deputy Governor - March 12, 2016 - at the Programme on Global Economic Turmoil, Impact on Indian Economy, New Delhi). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=995) | [pdf](RBI_Speeches_20160316_Global%20Economic%20Turmoil-%20Impact%20on%20Indian%20Economy%20and%20the%20Way%20Forward_Harun%20Khan.pdf)
15. Harun R Khan (ex-Deputy Governor of RBI). (June 11, 2016). Foreign Exchange Market & Cross-border Transactions: Some Random Reflections. 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_Speech_20160611_Foreign%20Exchange%20Market%20&%20Cross-border%20Transactions-%20Some%20Random%20Reflections.pdf)
16. Viral V. Acharya. (2017, December 14, 2017). Global spillovers: Managing capital flows and forex reserves. Keynote address at the NSE-NYU Conference on Indian Financial Markets, Mumbai, India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1051) | [[RBI_Speech_20171214_Global spillovers- Managing capital flows and forex reserves.pdf|pdf]]
17. Shah, A. (2018, September). Don’t just do something, sit there. National Institute of Public Finance and Policy. [Link](https://www.nipfp.org.in/media/medialibrary/2018/09/03092018.pdf)
18. Acharya, V. V. (June 29, 2019). Development of Viable Capital Markets – The Indian Experience. Indian School of Business, Hyderabad.
19. Kanungo, B.P. (Apr 25, 2019). India’s growing significance in global arena. Is it Sustainable? Are we ready for it? Reserve Bank of India.FEDAI Annual Conference at Beijing. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1074)
20. Sankar, T. R (Oct 14, 2021). *India’s Capital Account Management – An assessment*. 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)
21. RBI. (2022, April 18). Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications. Monthly Bulletin [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly_Bulletin_Article_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)
22. RBI. (July, 2023). Report of the Inter-Departmental Group (IDG) on Internationalisation of INR. [Link](https://m.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1244)
23. RBI. (Jan 17, 2025). Geopolitical Risk and Trade and Capital Flows to India. RBI-Bulletin. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=23131) | [pdf](RBI_Monthly_Bulletin_Article_20250117_Geopolitical%20Risk%20and%20Trade%20and%20Capital%20Flows%20to%20India.pdf)
### [[Publications (Data Releases) & Research#Research|Research]]
1. 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]]
2. Dua, P., & Ranjan, R. (2010, February 25). _Exchange rate policy and modelling in India_. RBI-DRG Studies. [Link]((https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12252) | [pdf](RBI_Research_DRG_20100225_Exchange%20rate%20policy%20and%20modelling%20in%20India.pdf)
3. Grewal, H. S., & Trivedi, P. (2022, September 21). *Monetary policy independence under a flexible exchange rate regime – The Indian case*. RBI Working Paper Series No. 14/2022). RBI-Working Paper Series (WPS). [Link](https://rbi.org.in/scripts/PublicationsView.aspx?Id=21340) | [pdf](RBI_Research_DEPR_20220921_Monetary%20Policy%20Independence%20under%20a%20Flexible%20Exchange%20Rate%20Regime%20–%20The%20Indian%20Case.pdf)
4. Sujata Kundu, Anshu Kumari and Deepika Rawat. (Jan, 2024). *Cross-border Capital Flows and Sudden Stops: Lessons from Emerging Market Economies*. - RBI - Occasional Papers - Vol. 44, No.2, 2023. [Link](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4517) | [pdf](RBI_Research_Occasional%20Papers_202409_RBI%20-%20Occasional%20Papers%20-%20Vol.%2044,%20No.2,%202023.pdf)
### [[Publications (Data Releases) & Research#Publications|Publications]]
[Groups/Committees](Groups%20and%20Committees.md)
1. 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)
2. RBI. Report of the Committee on the Global Financial System (CGFS) on Capital Flows and Emerging Market Economies
3. RBI. (July, 2023). Report of the Inter-Departmental Group (IDG) on Internationalisation of INR. [Link](https://m.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1244)
### Others
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. Narendra Jadhav. (April 4–6, 2005). _Exchange rate regime and capital flows: The Indian experience_ [Paper presentation]. Chief Economists' Workshop, Centre for Central Banking Studies (CCBS), Bank of England, London, United Kingdom. [pdf](Narendra%20Jadhav_200504_Exchange%20Rate%20Regime%20Capital%20Flow.pdf)
3. C. Rangarajan. (2015, March 13). _Issues in India’s external sector_ (5th Raja Chelliah Memorial Lecture, Raja Chelliah Memorial Lecture Series). NIPFP. [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)
4. FIFP. *Historical Background of Foreign Investment Promotion Board (FIPB)*. [Link](https://fifp.gov.in/AboutUs.aspx). Retrieved on August, 2025.
[^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 Conference at Brussels. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=953) | [[Musings of a Departing Forex Market Regulator_G Padmanabhan_06042015_RBI.pdf|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)| [[Foreign Exchange Market & Cross-border Transactions- Some Random Reflections_RBI_21062016.pdf|pdf
[^3]: Dr. Y.V. Reddy. (1997, August 15). Exchange Rate Management : Dilemmas \[Inaugural Address\]. XI<sup>th</sup> National Assembly Forex Association of India at Hotel Cidade De Goa. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=231) | [pdf](RBI_Speech_19970815_Exchange%20Rate%20Management%20-%20Dilemmas_Y.V.Reddy%20.pdf)
[^4]: Viral V. Acharya. (2017, December 14). _Global spillovers: Managing capital flows and forex reserves._ Keynote address at the NSE-NYU Conference on Indian Financial Markets, Mumbai, India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1051) | [[RBI_Speech_20171214_Global spillovers- Managing capital flows and forex reserves.pdf|pdf
[^1]:
[^5]: Subbarao, D. (May 11, 2010). Volatility in capital flows: Some perspectives [Speech]. High-level Conference on ‘The International Monetary System’, Swiss National Bank and the International Monetary Fund, Zurich. Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504)