1
The Indian Experience with Managing Capital Flows
SUBIR GOKARN Deputy Governor
Reserve Bank of India
High-level Seminar on Managing Capital Flows to Emerging Markets, Rio de Janeiro
May 26-27,2011
2
Slide 1: Balance of Payments
-20000
-10000
0
10000
20000
30000 20
00Q
2
2000
Q4
2001
Q2
2001
Q4
2002
Q2
2002
Q4
2003
Q2
2003
Q4
2004
Q2
2004
Q4
2005
Q2
2005
Q4
2006
Q2
2006
Q4
2007
Q2
2007
Q4
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
US
$ m
illio
n
Net Capital Flows Current Account Deficit
3
Slide 2: Composition of Capital Flows
-40000
-20000
0
20000
40000
60000
80000
100000
120000
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
US
$ m
illio
n
Composition of Capital Flows to India: 2000s
Foreign investment External Assistance Commercial Borrowings Rupee debt service NRI Deposits Other capital
-15000
-5000
5000
15000
25000
35000
45000
55000
65000
1993
-94
19
94-9
5
1995
-96
19
96-9
7
1997
-98
19
98-9
9
1999
-00
20
00-0
1
2001
-02
20
02-0
3
2003
-04
20
04-0
5
2005
-06
20
06-0
7
2007
-08
20
08-0
9
2009
-10
20
10-1
1(Ap
r-D
ec)
US
$ m
illio
n
Net Inflows of FDI and Portfolio investment to India
Direct investment Portfolio investment
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Slide 3: Exchange Rate Dynamics..1
-500
0
500
1000
1500
2000
40
41
42
43
44
45
46
47
48
49
50
Jan-
00
Apr-
00
Jul-0
0 O
ct-0
0 Ja
n-01
Ap
r-01
Ju
l-01
Oct
-01
Jan-
02
Apr-
02
Jul-0
2 O
ct-0
2 Ja
n-03
Ap
r-03
Ju
l-03
Oct
-03
Jan-
04
Apr-
04
Net FII flows (US$ mn) (RHS) Rs/USD (Avg)
-5000
-3000
-1000
1000
3000
5000
7000
39
40
41
42
43
44
45
46
47
May
-04
Aug-
04
Nov
-04
Feb-
05
May
-05
Aug-
05
Nov
-05
Feb-
06
May
-06
Aug-
06
Nov
-06
Feb-
07
May
-07
Aug-
07
Nov
-07
Net FII flows (US$ mn) (RHS) Rs/USD (Avg)
5
Slide 4: Exchange Rate Dynamics..2
-10000
-5000
0
5000
10000
15000
38
40
42
44
46
48
50
52
Feb-
08
Mar
-08
Apr-
08
May
-08
Jun-
08
Jul-0
8 Au
g-08
Se
p-08
O
ct-0
8 N
ov-0
8 D
ec-0
8 Ja
n-09
Fe
b-09
M
ar-0
9 Ap
r-09
M
ay-0
9 Ju
n-09
Ju
l-09
Aug-
09
Sep-
09
Oct
-09
Nov
-09
Dec
-09
Jan-
10
Feb-
10
Mar
-10
Apr-
10
May
-10
Jun-
10
Jul-1
0 Au
g-10
Se
p-10
O
ct-1
0 N
ov-1
0 D
ec-1
0 Ja
n-11
Fe
b-11
M
ar-1
1
Net FII flows (US$ mn) (RHS) Rs/USD (Avg)
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Slide 5: An Evolving Approach: The Exchange Rate
• Transition from balance to net surplus in the early 2000s
• Phase 1 Response (until Jan 2007): Intervention with sterilization • Design and use of Market Stabilization
Bonds • Phase 2 Response (Feb 2007 onwards): Essentially no intervention
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Slide 6: An Evolving Approach: Capital Controls
Preference Ordering Foreign Direct Investment Foreign Portfolio Investment in Equities Long-term Debt Short-term Debt
Barring some sector-specific constraints, FDI flows are unconstrained
Equity investments are unconstrained for institutions; new channels have been created for individuals
Debt flows are subject to approval relating to end-use Some quantitative and pricing controls are in effect on
debt flows
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Slide 7: A Conceptual View…1 Co-existence between capital controls and effectively
floating exchange rate since 2007
Strategic vs. Tactical Controls Preference Ordering reflects a strategic view of
macroeconomic benefits and risks of different channels Once controls are in place, they stay for some time,
making rules of the game stable and predictable “Reform” then implies a change in the risk-benefit
assessment of specific channels
Intervention and controls such as URR are tactical in nature
Issues of predictability and monetary management
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Slide 8: A Conceptual View…2 Intervention and controls such as URR are tactical in
nature Issues of predictability and monetary management Assessment Non-intervention has facilitated monetary policy
operations It has made stakeholders sensitive to exchange rate
risk, resulting in more effective hedging “Reform” implies development of market-based
hedging instruments and better regulation of OTC instruments
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Slide 9: Concluding Thoughts The Indian capital flow management framework has
evolved in response to challenges in maintaining macroeconomic stability
Even as intervention has been stopped, controls on some forms of inflows are still considered necessary
A balance has been sought through the conceptual distinction between strategic and tactical controls
Country circumstances differ and should determine the approach
However, this distinction might provide a useful input into the thought process