The RBI, in its latest credit and monetary policy, has struck two birds with one stone. First, the slew of Forex market-related announcements can be seen as entirely in keeping with its approach of gradual dismantling of controls on capital account transactions. Second, it is also an invitation from the RBI to a large number of listed and unlisted corporate, small and medium enterprises, and retail investors to join it in fighting the battle of the bulge—in Forex reserves.
The wealthy Indian can now remit up to $50,000 per year against the earlier limit of $25,000. Retail investors can also seek for overseas stocks. More significantly, resident entities have now been enabled to speculate on future exchange rate movements. The RBI is evidently counting on the participation of even those who had until now viewed Forex as something of only remote interest. This way, it hopes to establish a vibrant two-way traffic market for foreign currency.
However, it is a moot point whether the RBI’s blandishments would help achieve this. The external account freedom that was available even earlier has not really led to too many resident Indians rushing to convert their savings into dollars and exit the Indian market. Mutual funds have also not been able to mobilize large enough sums from domestic investors to touch their investment limits in overseas stocks. As it happens, the domestic market offers far more exciting investment opportunities. Moreover, investor psychology plays a role in the evident disinclination towards dollar holdings.
In the earlier days of scarcity, the specter of shortages coupled with elaborate Forex restrictions had created a vicious cycle that was self-reinforcing in accelerating the flight of domestic capital. People devised complicated routes to funnel funds abroad. But the recently granted freedom of investing in the overseas market seems to have had a recoil effect—confident that restrictions have largely been lifted, capital is staying where it can fetch higher returns even as inflows from foreign investors increase, thus setting in motion a virtuous cycle.
The freedom of investing in the overseas market seems to have had a recoil effect—capital is staying where it can fetch higher returns even as inflows from foreign investors increase
In fact, dollars stashed away abroad by Indians during earlier times are thought to be returning to contribute to the domestic growth story. The typical entrepreneur who would inflate the value of his foreign procurement bills and understate his export earnings in the hope of creating a provident cushion, has begun curtailing outflows and dumping his Forex earnings.
What about
In theory, it sounds like a ‘no-brainer’ thing to do, but in reality it is a far more complicated issue. People are more likely to trust the RBI because it is run by technocrats as opposed to the government, which is run by politicians who are focused on winning the next election.
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