Coronavirus | India's deputy governor RBI Shankar says capital conversion will only increase

The rate of change in capital conversion will only increase with that comes responsibility to ensure that such flows are effectively managed with the right combination of capital flow measures, macroprudential measures and market intervention, said the deputy governor in his keynote address on the fifth Foreign Exchange Dealers Association of India annual day.

Under the fully accessible route FAR foreigners can have full access to some specified securities, 5 - year, 10 year and 30-year to start with. The idea is to invest in foreign investors in these fixed derivatives where international investors can invest in these bonds in full.

Over time, the entire government security issuance will be eligible for foreign investment, according to Rabi Shankar.

While experience of other countries suggests that non-residents are unlikely to hold a major portion of outstanding stock, substantial debt holdings could make India vulnerable to the risk of sudden reversals, he said.

While index investors are unlikely to indulge in sudden reversals, it may need to be considered, from a macroprudential perspective, whether FAR should be linked to index inclusion, Rabi Shankar said.

Going forward the liberalised REMITTANCE scheme, which helps Indians send up to $250,000 abroad each financial year, will have to be reviewed. The deputy governor said there could even be the need to review whether the limit can remain uniform or can be connected to some unique variable for individuals.

Currency converting will also bring integration of financial markets. With increased conversion, offshore currencies and interest rates will become linked to onshore markets in the future. The has moved to do that in interest rate derivative segment, while the Non-deliverable forwards NDF market for the rupee is also an effort in that direction.

After Indian entered into NDF space, the spread narrowed and overseas people will eventually end up holding rupee resources if local bonds are available in overseas markets.

That there is no chance of India having a robust bank account for non-residents, whether they want to hold and what should be done. This will be an important early step in internationalisation of the rupee and, therefore, needs to be considered carefully, the deputy governor said, adding that, with larger offshore transactions, there will be a need for a proper mechanism for information flow.

With greater integration, it is important that prices in the domestic market are advantageous and transparent to all. But individuals and small firms are denied good prices by the deputy governor who criticised the lenders for not giving enough importance to retail platform for foreign exchange trading, since it is not in their best interest to do so.

In this age of technology, it may not really be possible for any length of time to shun superior technology or even electronics. There must be a debate on the use of the platform and banks should make an effort to give it a fair trial, Rabi Shankar said.

Capital account conversion will bring with it some global risks and challenges, and market participants, especially banks, will have to prepare themselves to manage the business process changes and associated risks associated with capital conversionibility, Rabi Shankar said.