Reserve Bank Deputy Governor HR Khan has said India is not ready for opening its capital account fully to foreign investors at this point in time as “the pros and cons of such liberalisation are a contentious issue”.
According to Khan, the full bond-currency-derivative (BCD) nexus has to wait on progress in capital account liberalisation. “I must point out that BCD nexus is neither absolutely necessary nor a sufficient condition for mobilising resources for investment to support economic growth. I will just have to point out the growth story of post-war Japan, that of China of last two decades and even of India before the crisis to support this point,” Khan said in a speech.
India allowed current account convertibililty which means foreign exchange is available for the trade account — imports and exports.
He said the BCD nexus is an ideal objective in an open economy financial system. What it means is this: any foreign investor, using any international currency, can buy an Indian Government or corporate liability denominated in rupees or otherwise and hedge all risks, either onshore or offshore, the attendant credit, interest rate and currency risks. Khan also said the RBI is keen to develop a wide range of derivatives products but with caution, like considering introducing bond futures in other maturities apart from 10-year maturity allowed now.
The RBI is also considering relaxing prudential rules for credit default swaps, which were introduced with a high dose of safety measures and was perhaps limiting liquidity, Khan said.