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DECLARATION

I here by declare that the project report entitled:

A Project Report on “CAPITAL ACCOUNT CONVERTIBILITY

” submitted in partial fulfillment of the requirement for the degree of Bachelor

of Business Administration to University, This is my original work and

not submitted for the award of any other degree, diploma, fellowship, or any

other similar title or prizes.

Place: Noida

Date:

(Name)

Registration No.

2



Acknowledgement

The project of this nature is arduous task stretching over a period of time,completing a project like this one takes the effort and cooperation of manypeople.

Although this project report is being brought in my name, it bears an imprint of guidance and cooperation of many individuals. Several persons with whom Iintegrated have contributed significantly to the successful completion of theproject study. In the successful & trouble free completion of my final term

project titled “CAPITAL ACCOUNT CONVERTIBILITY.

I extend my deepest and sincere thanks to my project guide, Mr. and otherFinance Executives of Company Name for the unflinching support and guidancethrough out the project

I would also like to thank all the executives who shared their precious time andexperience with me.

Last but not the least, I extend my sincere thanks to all the staff members of Company Name for their cooperation.

(Name)

Registration No.

3



Certificate of Originality

This is to certify that the project titled “Capital account

convertibility, the way ahead for India” is an original work of thestudent and is being submitted in partial fulfillment of the award of

Bachelor degree in business administration of University.This report has not been submitted earlier either to this university or to any other university/institution for the fulfillment of therequirement of a course of study.

For Company Name Authorized Signatory

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Table of Contents

Executive Summary ...................................................................................................................51. Introduction ............................................................................................................................72. Issues in Capital Account Convertibility ............................................................................. 103. Advantages of CAC ............................................................................................................. 164. Darker Side of CAC ............................................................................................................. 175. International Experience on CAC ........................................................................................ 21

6. Preconditions and Roadmap to CAC ................................................................................... 407. Present Condition in India ................................................................................................... 458. Approach to Convertibility ................................................................................................. 509. Impacts of Capital Account Convertibility on Banks .......................................................... 5110. Conclusion ......................................................................................................................... 54References ................................................................................................................................ 59

Executive Summary

Capital account convertibility (CAC) is the freedom to convert local financial assets into

foreign financial assets and vice-versa at market determined rates of exchange. It is

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associated with changes of ownership on foreign/domestic financial assets and liabilities and

embodies the creation and liquidation of claims on or by the rest of the world.

For better or worse, the forces driving the movement towards greater capital account

convertibility are not likely to diminish – barring a profound upheaval in the global economy

- in the foreseeable future. The Mexican crisis of 1994, the Asian crisis of 1997-1998 and

crises in Brazil and Russia have led many observers to question the stability of the global

financial system, but none has resulted in any fundamental change in the underlying process.

CAC is no more a choice. It is part of prudent policy to work out an orderly opening of the

capital account instead of reforming under duress once a crisis has hit the economy. Of late,

the policy debate has increasingly centered on the institutional and macroeconomic

frameworks that must be put in place to limit the exposure of developing countries to sudden

capital flow reversals. The transition process from a closed to an open capital account has

come under closer scrutiny and a broad consensus has formed around the institutional and

macroeconomic preconditions that should be in place before, or at least pursued

simultaneously with, capital account liberalization.

India has started the move towards opening up of Capital Account in 1991. But, the opening

had its share of controls. It had adopted a ‘gradual’ approach over a ‘big bang’ approach

while toddling along this path. India is still not ready to fully take on CAC. The Reserve

Bank of India formed a committee under Dr. S. S. Tarapore to clearly lay out the way it

should move to liberalize the capital account. The committee after studying the experiences

of countries across the globe with special emphasis on developing nations charted out a clear

cut path with pre-conditions and time frames for fulfilling them. We haven’t fulfilled all the

pre-conditions required for CAC so the need of the hour is to have a change in the

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conservative nature and thinking of our banking and financial policies and restructure out

macro economic policies before we opt for CAC. The emphasis given by the committee on

satisfying the conditions, rather than worrying too much about time frame also highlights

India’s cautious approach. It will take a while for things to be put in place and once a

domestic financial architecture and macro policies are put in place, CAC can flow in as a

natural process.

1. Introduction

Countries have either balance of payment surplus or a balance of payment deficit. The

balance of payments is merely a way of listing receipts and payments in international

transactions of a country. The balance of payment can be broken down into balance of trade

(export & import of goods), balance of current account (includes the balance of trade, the

balance of services and the balance of unrequited transfers). The balance of current account

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shows the flow aspects of a country's international transactions. Theoretically speaking, any

surplus or deficit on the balance of current account can be settled by means of a transaction

on the capital account.

Capital Account represents Capital Receipts (borrowings from, capital repayments by, or

sale of assets to foreigners) as well as Capital Payments (lending to, capital repayments to, or

purchase of assets from foreigners).

Capital Account Transactions are subject to exchange controls. Thus prior approval of the

Government and/or the Central Bank is necessary for borrowing abroad, placing fund abroad,

acquisition of assets abroad, portfolio investments in India by foreign investors, issue of

ADRs & GDRs etc. When we talk of capital account convertibility we mean easing out of all

these restrictions.

In layman’s language when we talk of convertibility we mean the ease of conversion of a

currency to be exchanged for another currency. When people have the freedom to switch

over from one currency to another for the purpose of buying goods and services, then we say

that “current a/c convertibility” is in force. On the other hand, if people are allowed to change

currency in order to buy capital assets such as bonds, shares and property, then the nation has

“capital account convertibility” (CAC) in force. Thus, if India has CAC, a company (Indian

or foreign) owing shares in India will have the freedom to sell the shares, change the rupee

into yen or any other currency and can move the money out of India.

In its report on capital account convertibility to the Reserve Bank of India, the Tarapore

Committee provided a succinct and subtle definition:

Capital account convertibility is the freedom to convert local financial assets into foreign

financial assets and vice-versa at market determined rates of exchange. It is associated with

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changes of ownership on foreign/domestic financial assets and liabilities and embodies the

creation and liquidation of claims on or by the rest of the world. Capital account

convertibility can be, and is, coexistent with restrictions other than on external payments. It

also does not preclude the imposition of monetary/fiscal measures relating to foreign

exchange transactions, which are of a prudential nature. The traditional policy regime in

many developing countries has been to restrict cross-border movements through often

elaborate systems of controls and regulations. The aim of these restrictions was to retain

domestic savings in the economy for domestic investment and to insulate the economy from

external shocks. In the 1980s and 1990s, a confluence of events, including diminishing levels

of foreign aid, the expansion and integration of global capital markets and the collapse of the

socialist bloc in Europe, served to undermine this policy regime. Many developing countries

became aware that there were no domestic savings to retain and that a more open capital

account enabled them to access desperately needed resources. Furthermore, it had become

apparent that a closed capital account did not ensure protection from external funding crises

(as, for example, India discovered in 1991). Thus, a mixture of structural changes in the

world economy, ideological shifts and the urgent need for resources in developing countries

all served to propel many developing countries towards greater liberalization of capital

account transactions.

For better or worse, the forces driving the movement towards greater capital account

convertibility are not likely to diminish – barring a profound upheaval in the global economy

- in the foreseeable future. The Mexican crisis of 1994, the Asian crisis of 1997-1998 and

crises in Brazil and Russia have led many observers to question the stability of the global

financial system, but none has resulted in any fundamental change in the underlying process.

Instead the policy debate has increasingly centered on the institutional and macroeconomic

frameworks that must be put in place to limit the exposure of developing countries to sudden

9



capital flow reversals. The transition process from a closed to an open capital account has

come under closer scrutiny and a broad consensus has formed around the institutional and

macroeconomic preconditions that should be in place before, or at least pursued

simultaneously with, capital account liberalization.

2. Issues in Capital Account Convertibility

1. Composition of capital flows

The composition of capital inflows is a key determinant of their susceptibility to sudden

reversal and their beneficial impact upon the recipient country. The authorities must thus be

aware of the composition of inflows and be prepared to limit exposure to more volatile

classes of capital. The different kinds of capital flows are – official, foreign direct

investment, portfolio and bank loans - and their characteristics. We can examine them along

six dimensions - cost, conditionality, risk bearing properties, transfer of intellectual property,

their impact on investment and their vulnerability to sudden reversals. An evolutionary

process could be observed through which an economy moves from attracting only flows of

official finance and FDI in natural resources, through inflows of FDI in non-resource

extracting sectors and bank finance, to later stages of development in which it attracts

portfolio equity and bonds and in which its companies can list their shares on developed

country stock markets. Foreign direct investment is the costliest form of inflow for the

recipient country, but it is also the most beneficial in terms of development since it is stable,

translates completely into an increase in investment and brings with it access to intellectual

property. In contrast, bank lending is less expensive (especially on short-term maturities) but

does not have the beneficial investment properties of FDI and is far more unstable. Therefore

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it is worthwhile for developing countries to encourage FDI despite its cost in order to reap its

benefits in terms of economic growth. The susceptibility of developing countries to financial

and currency crises and the real costs that these impose on the real economy, mean that over

the longer term it is worthwhile to pay the higher cost associated with more stable flows and

encourage FDI. However it must be noted that is not necessary for a country to have a

liberalized capital account in order to attract FDI. FDI can be accommodated through special

provisions that enable the repatriation of profits. Furthermore, while capital account

liberalization should encourage FDI, it’s not very evident whether it is a major determinant

of the direction of FDI. Rather, FDI is driven, among other factors, by expected profitability,

relative prices, confidence in macroeconomic policy, political stability and the quality of

contracting and legal enforcement. An adequate legal structure, especially contract law and

bankruptcy law is very crucial, for encouraging direct investment. It is pertinent to note that

among developing countries, China has attracted large inflows of FDI and it has retained a

very restrictive capital account regime (although it must be pointed out that a large

component of this inflow are Chinese funds seeking to take advantage of preferential

treatment of FDI). FDI has been the major component of Uganda’s capital inflows since

1987 and this has served to reduce their volatility. Much of this FDI has come from returning

Asians who were driven and expropriated under the Amin regime. Thus, the return of

expropriated property and the establishment and protection of property rights – along with

capital account liberalization - has been a key element in encouraging FDI.

2. Capital controls

The vulnerability and fragility of financial systems in many countries and the negative

properties of short-term flows means that countries must take a pragmatic stance towards

capital controls. The distinction must to be made between controls that hinder efficient

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international financial intermediation and those that can be viewed as prudential controls

designed to contain the potential risks of international capital flows. In the transitional period

towards a more open capital account, controls may play a role in insulating the economy

from volatile capital flows or allowing time for the strengthening of financial market

institutions and other initial conditions. It was necessary for countries to retain the right to

impose controls on capital outflows during a crisis (such as those Malaysia implemented in

1998). Undoubtedly the most widely studied example of the type of capital control regime

was that implemented by Chile from 1991-1998. Chilean policymakers sought to limit the

country’s exposure to a surge in capital inflows, minimize exchange rate appreciation,

lengthen the maturity structure of external liabilities and discourage volatile short-term flows.

It is important to note that Chile selected a price-based control, the unremunerated reserve

requirement (URR), in preference to more quantitative controls. Studies show that the

controls did not restrain the appreciation of the exchange rate and that over time the control

regime lost effectiveness, but they also indicate that the controls provided room for some

monetary independence by maintaining an interest rate differential and altered the

composition of inflows. Thus, when the Asian crisis hit, Chile had only a small exposure to

short-term flows. Prudential controls on short-term flows are desirable. Developing countries

had difficulties intermediating funds from the short to the long end of the yield curve, which

left them vulnerable to maturity mismatches in their external accounts. Exposure to short-

term funds develops systemic vulnerability of developing countries to reversals of

confidence. The case of Bangkok International Banking Facility (BIBF) that had encouraged

large-scale inflows of unhedged, short-term loans into Thailand exemplifies the point. The

limits on the foreign exchange exposure of the banking system should be carefully regulated

and monitored. In the Indian reform effort, the Rangarajan committee placed an emphasis

on non-debt creating flows and advised that no short-term debt be permitted at all.

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Subsequently, the Indian regime has been characterized by close monitoring and severe

quantitative controls on short-term borrowing (excepting those strictly related to trade) that

has resulted in short-term debt accounting for only 4% of total debt in June 2000. It is

difficult to maintain the distinction between short- and long-term flows in an environment of

highly developed financial markets. For example, even with FDI flows, agents could borrow

domestically and short the currency. But, controls are no substitute for a sound

macroeconomic policy and strong institutional fundamentals and should not be seen as a

substitute for reform. There was nothing fundamental about the control regime in Chile and it

was simply a practical policy device that was dropped when inflows began to slow in the

wake of the Asian crisis. Regarding the efficacy of controls, controls on outflows are

generally ineffective compared with inflow controls. Inflows are easier to control since

investors generally want legal title to their assets in a foreign country. Some controls are a

good idea but much uncertainty remains as to which controls are effective and feasible.

Certain institutions can be effectively regulated to prevent outflows, among these were banks

pension funds and authorized dealers. Several participants at the conference also raised the

issue of foreign exchange denominated accounts in the domestic financial system of

developing countries. It could be noted that large-scale dollar-denominated assets within a

country can precipitate a crisis by creating destabilizing flows. Consequently, no dollar-

denominated transactions are allowed between residents, foreign currency accounts can be

used only for external payments and if they are required for local payments they must be

converted into local currency. Foreign exchange accounts accounted for one quarter of broad

money (M3) in Uganda in April 2000 and there has been a continuing clear preference for

these accounts in the domestic system.

3. Corporate Balance Sheets

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The issue of “hidden” foreign exchange risk on corporate sector balance sheets also needs to

be looked into carefully. The case of Korea where the huge foreign currency exposure of the

corporate sector was revealed after the collapse of the currency in 1998 is an example of this

hidden risk. The problems that Uganda faces as a result of capital account liberalization are

largely associated with the seasonality of export receipts and the resulting speculative

behavior, which makes management of the exchange rate difficult. This exposes firms that

have taken positions in foreign currencies. Thus there was a need to develop instruments to

deal with private sector, non-bank exposure. Part of the solution resides in advice from the

commercial banks and increased education. In the Indian system the Reserve Bank closely

monitors developments in corporate sector balance sheets and requires that corporates obtain

permission for capital transactions.

4. Transparency

Jaime Sanz, Director of Sovereign Ratings at Fitch, argues strongly for predictable,

commitment-based policy regimes in developing countries. He points to Argentina’s

currency board arrangement, South Africa’s multi-annual budgeting and Brazil’s

privatisation program as examples of the kinds of policies that would successfully attract

foreign capital. He argued that policy flexibility was overrated since there was little

maneuvering room for policy in any case. Argentina’s currency board was a not desirable

model for other countries since it imposed significant costs on the domestic economy.

Information and transparency are central to successful policy in developing countries.

Precise, regular information is essential to attracting investors to countries. The marginal

product of information in Africa was still very high given the poor record of disclosure there

and investor ignorance of the region. The provision of information could backfire since it

could highlight faults that are shared by many countries but publicized by only a few. The

vulnerability of developing countries to self-fulfilling crises emerges because their lack of

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transparency leads to herd-like behavior in the financial markets. The IMF also highlights the

central role of accurate and widely disseminated information in the liberalization process.

Keynes in his “beauty contest” analogy argued that informed traders may follow noise

traders since it is not a question of what one’s own beliefs or knowledge regarding

fundamentals but rather that of the common perception. Information may help ameliorate this

situation but it is unlikely to eliminate it entirely.

5. Multilateral Institutions and the International Financial Architecture

The adjustment policies pursued by the IMF during the Asian crisis did not address the panic

that had taken over financial markets. Fiscal contraction served to exacerbate the output fall

caused by the collapse in investment. The collapse of the pegged exchange rate nominal

anchor was not replaced by an effective framework for monetary policy that could take its

place. In its place, a restrictive fiscal policy was adopted. This highlights the need to establish

alternative nominal anchors in macroeconomic policy. An international lender of last resort

facility is unlikely to emerge in the near future. The principles underlying a LOLR facility

are problematic to implement at the international level and the funds of the IMF are grossly

inadequate to fulfill the task. The need to draw in lending from advanced countries is

uncertain and subject to political constraints. Workouts and bail-ins are a critical element in

crisis resolution but are subject to moral hazard since they allow lenders to escape without

bearing a significant proportion of losses. Moral hazard can be dealt with through, (i) an

international lender of last resort or the imposition of capital controls, (ii) “middle way”

solutions such as standstill agreements, and (iii) the limited lender of last resort facility

subject to pre-qualification. The problems with a full-fledged lender of last resort have been

noted above. Restrictions on IMF lending also could create uncertainty and deepen a crisis.

The fundamental objection was that in view of the pervasive uncertainty about future crisis it

was necessary to maintain flexibility, a payments standstill sanctioned by the IMF was a

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better solution since creditors would incur a write-down in their assets and the claim on IMF

financing would be restricted to smaller amounts than in either the full or partial LOLR

facilities envisioned in the other options. In view of the risks inherent in capital account

liberalization, the advice from multilateral agencies must reflect this caution. However, they

must maintain their commitment to eventual liberalization and must encourage reluctant

governments towards this objective. However, in view of the questionable benefits and

obvious risks involved, there must be no attempt by multilateral agencies to push countries

towards convertibility and their function should be purely an advisory one.

6. Capital account liberalization and growth

The linkage between capital account liberalization and economic growth is not very evident.

There was little evidence that growth rates improved in countries that liberalized the capital

account. IMF admitted that there was no clear evidence that capital account convertibility is

beneficial and that in the academic literature the measures of the intensity of controls are

either crude or only available for short time spans. The theoretical literature does suggest

benefits, the overall magnitude is probably not highly important. In his view, capital account

liberalization was a “second-order” problem and that sound macroeconomic policy and

effective supervisory and prudential structures are more important. In contrast, some argue

that studies that show no effect of capital account convertibility on growth use a yes/no

measure of convertibility while the one study that does show a positive effect of capital

account liberalization on growth distinguishes between different degrees of convertibility.

3. Advantages of CAC

The advantages of CAC can be briefly stated as follows -

• Leads to efficient global allocation of capital

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• Helps in raising finances in a developing country

• It enables the country to take the advantage of the substantial benefits involved in

participation in the open world economic system. For e.g., suppose interest rates in

Singapore become very high, Americans, Europeans and the Japanese can

immediately divert some of their savings to Singapore and can earn profit form this.

However, India cannot avail such opportunities. This applies equally well to other

sectors of the economy.

• Help improve the domestic financial sector (e.g. - Recently trading under Rolling

Settlements has been introduced and made compulsory in the Indian bourses, which

requires CAC to be in place.)

• To tap investment opportunities in global markets

• Banks will be able to lend abroad

4. Darker Side of CAC

Though CAC has many advantages, still it is fraught with risks. With fluctuations in

exchange rates and interest rates there can be large, sudden outflows of the foreign exchange.

It greatly heightens a country’s vulnerability to reversals in capital flow that can precipitate

severe currency and balance of payment crises. The Southeast Asian crisis was a manifested

ill of an uncontrolled CAC regime that shattered the economies of Thailand, Malaysia,

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Indonesia, Philippines and South Korea. Even strong economies like Hong Kong and

Singapore met with powerful attacks by foreign exchange gamblers. They were followed by

absolute collapse of Russian currency. Brazil was affected. The gamblers in foreign

currencies pose a major threat to the world financial system. In all this crises India was not

seriously affected just because of the partial convertibility of the Indian rupee.

Financial crises will always be with us; and there is no magic bullet to stop them. These

conclusions are important because they should make us appropriately wary about statements

of the form, “we can make free capital flows safe for the world if we do x at the same time,”

where x is the currently fashionable antidote to crisis. Today’s x is “strengthening the

domestic financial system and improving prudential standards.” Tomorrow’s is anybody’s

guess.

Examples of financial markets not reflecting fundamentals that are pertinent here -

1. Mexican crisis – Analysts claimed that Mexico borrowed too much. If Mexican govt.

wasn’t wise enough to know how much should they borrow, why did lenders lend

them money?

2. Asian Crisis –Banks lent a lot of short-term money and then withdrew in a year.

If Mexico is thought to have borrowed so much, it is also fair to ask why the markets were so

lax in providing the financing. Having asked the same question about the debt crises of the

1930s and 1980s…, the answer would be that investors behave myopically, each one perhaps

thinking that it will be possible to exit ahead of the rest…. At this point, we can conclude that

better disclosure of country data and stronger economic institutions (such as independent

central banks and more transparent budgetary practices) can reduce the chances of another

Mexican crisis but cannot totally prevent it. One might add that the current emphasis on

strengthening domestic financial systems glosses over the practical difficulties. Putting in

place an adequate set of prudential and regulatory controls to prevent moral hazard and

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excessive risk-taking in the domestic banking system is a lot easier said than done. Even the

most advanced countries fall considerably short of the ideal, as their bank regulators will

readily tell you. The U.S. Comptroller of the Currency recently complained that only four of

the 64 largest North American banks practice state-of-the art portfolio risk management and

that loan standards are therefore more lax than they ought to be. Imagine the problems that

will keep bank regulators awake at night in India or Turkey!

Think of capital flows as a medicine with occasionally horrific side-effects. The evidence

suggests that we have no good way of controlling the side effects. Can it be good regulatory

policy to remove controls on the sale and use of such a medicine?

Costs of Capital Controls –

The fundamental argument in favor of removing capital controls is that they are costly to

economic performance. In theory, the costs come in different forms. Capital controls prevent

risk-spreading through global diversification of portfolios. They result in an inefficient global

allocation of capital. And they encourage irresponsible macroeconomic policies at home.

What about the evidence? There is no evidence in the data that countries without capital

controls have grown faster, invested more, or experienced lower inflation. Capital controls

are essentially uncorrelated with long-term economic performance once other determinants

are controlled for.

We have to live with financial markets that are prone to herding, panics, contagion, and

boom-and-bust cycles. Appropriate macroeconomic policies and financial standards can

reduce the risks but not eliminate them. This is as true of domestic financial markets as it is

of international ones. Thanks to advances in technology and communications, international

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capital flows will likely continue to expand irrespective of government policy. The question

is whether it makes sense to link up domestic financial markets tightly with international

ones, and therefore speed up this process. There are two major risks in doing so: First, we

increase the liquidity to which borrowers in an individual country have access, thereby

greatly magnifying the effects of any turnaround in market sentiment. Second, we increase

systemic risk through contagion from one market to another. On the other hand, the benefits

of removing capital controls remain to be demonstrated. The greatest concern about

canonizing capital-account convertibility is that it will leave economic policy in the typical

“emerging market” hostage to the whims and fancies of two dozen or so thirty-something

country analysts in London, Frankfurt, and New York. A finance minister whose top priority

is to keep foreign investors happy will be one who pays less attention to developmental

goals. We would have to have blind faith in the efficiency and rationality of international

capital markets to believe that these two sets of priorities will regularly coincide.

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5. International Experience on CAC

Over the past two decades several countries have undertaken measures to open the capital

account of their balance of payments as part of a broader process of financial liberalisation

and international economic integration. For most industrial countries, the evolution of CAC

was relatively slow over the sixties and seventies. The process of liberalisation of the capital

account gathered momentum in the eighties and early nineties contemporaneous with the

globalisation of financial markets. The move to CAC in the industrial countries was

facilitated by the introduction of the Code of Liberalisation of Capital Movements by the

OECD and the Second Directive of Liberalisation of Capital Movements by the European

Union. All industrial countries had eliminated exchange controls on both capital inflows and

outflows. For developing countries the evolution of CAC has been varied. Prior to the

eighties a few of these countries began to liberalise the capital account, drawing strength

from a healthy balance of payments position. In recent years, however, a number of

developing countries have moved fairly rapidly to institute CAC despite initially weak macro

economic conditions. While a majority of developing countries still retain capital controls de

jure, de facto controls are less prevalent.

1. The Approach of International Organizations to CAC

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A number of international organisations have developed a framework for the liberalisation of

capital transactions. While the Organisation for Economic Co-operation and Development

(OECD) Codes of Liberalisation of Capital Movements and the European Union (EU)

Directives have provided momentum to the process of instituting CAC in industrial

countries, the IMF and regional organisations have also addressed CAC in the context of

developing countries. A new impetus for liberalising capital accounts is expected to emerge

from the World Trade Organisation (WTO) through agreements on trade in financial services

and associated capital movements.

1.1 IMF

While it has recognised the freedom for countries to impose or maintain capital controls for

balance of payments reasons and exchange rate stability, the IMF has welcomed steps to

liberalise capital transactions where this was considered to be a crucial element of broader

structural reforms. In the recent period, the IMF has taken a keen interest in issues relating to

CAC in the context of the progressive integration of the world's capital markets. For

industrial countries, the IMF has welcomed initiatives to achieve the OECD and EU Codes.

For developing, countries, the IMF have adopted a case by case approach. While it has

generally supported a gradual process with concerns expressed about the appropriateness of

the large capital inflows which were not in relation to strong fundamentals, it has encouraged

an acceleration of this process in some cases. Furthermore, the IMF has underscored the

crucial importance of prudential regulations and supervision in the context of strengthening

the intermediation by the financial system in the face of freer capital flows. In general, the

IMF's treatment of CAC has been selective. It has generally eschewed urging rapid

liberalisation but has encouraged some countries to liberalise capital restrictions (Central and

Eastern Europe). Furthermore, there has been a general discouragement of the use or

22



reimposition of capital controls, though, unlike under current account convertibility where

reimposition of controls is not permitted, the IMF recognizes the need for temporary

reimposition of capital controls if the emerging situation so warrants.

1.2 OECD

The OECD has adopted a non-compulsory approach towards capital account liberalisation,

based on the uniformity of treatment under different national rules. The Code of

Liberalisation of Capital Movements first adopted in December 1961 sets out the general aim

that "members shall progressively abolish between one another, restrictions on movements of

capital to the extent necessary for effective economic cooperation" ( Article I a).

Liberalisation refers to the abolition of official restrictions on the conclusion or execution of

both transactions and transfers. The obligation to liberalise goes beyond restrictions on

foreign exchange because the underlying, transactions should not be frustrated by legal or

administrative regulations.

1.3 EU

The EU assigned low priority to the liberalisation of capital movements. Capital controls

were to be eliminated only to the extent necessary to ensure proper functioning of the

Common Market. As a result, there was no commitment to liberalise capital movements. By

the early eighties, only five of the member countries had abolished exchange controls on

capital movements. Over the eighties, emphasis on liberalising capital movements gained

momentum in the context of financial integration within the EU. These efforts culminated in

the ratification of the Single European Act in 1987. The Act specifically required all

restrictions on capital movements be removed and explicitly recognised full liberalisation as

a necessary condition for creation of the Common Market.

23



2. Country Experiences

2.1 Initial Conditions at the Time of Move Towards CAC

In the assessment of the initial conditions prevalent in various countries on the eve of the

move towards CAC, the experiences of few countries were studied. These country

experiences reveal wide variations in the macro economic conditions, the strength of the

balance of payments and the progress of overall financial liberalisation and as such, any

generalisation is difficult. Nevertheless, for purposes of presentation, the selected countries

are grouped into two categories, namely, those which are considered to have instituted CAC

by the IMF's classification (Argentina, Indonesia, Malaysia, New Zealand) and those which

have made considerable progress in liberalising capital transactions (Chile, Mexico, the

Philippines, South Africa, Korea and Thailand).

A common feature of the countries drawn from the IMF's classification is that the run up to

CAC was set against the backdrop of inward looking economies pursuing import substitution

and extensive government intervention.. High levels of tariffs and proliferation of non-tariff

barriers provided protection to domestic industry and allowed inefficiencies to take root.

Financial repression was widespread. Furthermore, with the exception of Argentina and

Malaysia, countries in this group undertook CAC as part of an adjustment to crises in their

economies involving reversal of growth, balance of payments difficulties and rise in external

indebtedness.

At one end of the spectrum is Malaysia where strong initial conditions, embodied in high

rates of growth, a relatively deep financial structure and a strong fiscal position were

reversed in 1985 due to a sharp decline in exports and a collapse in asset prices which

adversely affected the portfolios of the financial institutions. In the hostile investment climate

24



which ensued, real GDP declined by 1 per cent, the current account deficit was at 3 per cent

of GDP and external debt rose to 65 per cent of GDP. The crisis exposed deep seated

weaknesses in the financial system. A policy package including liberalisation of capital

transactions in 1985-86 brought about a recovery in 1987.

In Argentina, CAC occurred in two phases i.e., in 1976-81 and in 1989-91. The process of

CAC was interrupted by the reimposition of capital controls following real exchange rate

appreciation, balance of payments deterioration, explosion in the external debt and capital

flight. The first phase of CAC was undertaken though the economy was in severe macro

economic disequilibrium with acute foreign exchange shortage, negative net foreign

exchange reserves and hyper-inflation. The approach to the second phase of CAC starting in

1989 centered on fiscal discipline, inflation control, strengthening of the balance of payments

embodied in a surplus in the current account and the build up of reserves; the final move to

CAC was rapid with the setting up of the Currency Board and the Law of Convertibility in

1991.

New Zealand presents another shade of the spectrum where weak initial conditions were

sought to be addressed by a rapid move to CAC. Prior to 1984, New Zealand was one of the

slowest growing economies in the OECD with real GDP growth averaging less than 3 per

cent. The inflation rate rose from 3 per cent in the mid sixties to an average of 14 per cent

during 1975-84. Balance of payments difficulties had become chronic and a substantial

accumulation of official debt had occurred prior to 1984. The oil shocks together with

expansionary financial policies undermined macro economic stability. A combination of

unsatisfactory fiscal and monetary management, a pegged exchange rate, persistent

expectations of devaluations and frozen interest rates culminated in a severe foreign

exchange crisis in 1984. The policy response was rapid and extensive including a large

devaluation, removal of interest rate controls, price freeze and a swift process of abolition of

25



exchange control. Policies were designed around an explicit inflation target under a legislated

mandate and strong fiscal consolidation.

Indonesia's approach to CAC was unique in the sense that despite weak initial conditions it

established an open capital account in the early seventies; moreover, the capital account was

liberalised before the current account. It was not until the late eighties and early nineties that

the domestic financial system was deregulated. On the eve of instituting CAC, import

substitution and inward orientation had resulted in a continuous deterioration in the

performance of the economy. Real GDP growth averaged around 2 per cent. The domestic

saving rate had declined throughout and turned negative by 1966-67. Monetary policy played

a subservient role in accommodating expanding fiscal deficits. Inflation was well above 100

per cent up to 1968. Simultaneously, the balance of payments deteriorated with the foreign

exchange reserves being totally eroded. The stabilisation plan announced in 1966 brought

forth immediate results. Thereafter, Indonesia benefited from the oil boom during the

seventies, suffered downturn and adjustment during the eighties and entered a period of

export led growth since 1989. CAC has acted as a catalyst in accelerating financial and real

sector reforms and helped in maintaining confidence among foreign investors. At the same

time, it exposed the Indonesian economy to the discipline of external pressures and brought

to the fore the vulnerability of the financial sector.

The group of countries which do not qualify as being convertible on the capital account by

the IMF's classification but have nevertheless progressed considerably in the liberalisation of

capital transactions reveal heterogeneous initial conditions. There is the experience of Chile

and Mexico where capital account liberalisation was undertaken first in the early seventies in

an effort to restructure their economies with a distinct tilt towards outward orientation; the

reform processes were therefore anchored on a fixed nominal exchange rate. In contrast,

26



Thailand and the Philippines reveal typically Asian approaches to capital account

liberalisation marked by efforts to concomitantly strengthen initial conditions.

Chile's experience with liberalisation of the capital account falls into two phases. Prior to the

first phase (1974-81), there was a massive intervention of the State in economic activity. As a

result, the fiscal deficit exploded and was monetised. By 1973, inflation reached an annual

rate of 600 per cent, the public sector deficit was 25 per cent of GDP and international

reserves were wiped out with a current account deficit of nearly 3 per cent of GDP. Real

GDP had declined by a precipitous 6 percent in 1973. The first phase of relaxation of capital

controls formed part of a rapid and drastic laissez faire type reform. Price controls were lifted

and subsidies eliminated. Quantitative restrictions on trade were removed and tariffs were

cut. The liberalisation of capital controls brought about a surge in capital inflows. While

growth resumed with the introduction of reforms, macro economic instability persisted and

financial liberalisation proceeded at a fast pace without the provision of proper regulation

and control. In 1978, the nominal exchange rate came to be used as an anchor for the price

level in the face of runaway inflation. The result was a steep real effective exchange rate

appreciation due to surges in private capital flows. The large overvaluation of the Peso led to

a loss of credibility in the sustainability of the exchange rate and external debt. As real

interest rates rose and a severe international recession set in, foreign capital inflows dried up.

Domestic output dropped by nearly 15 per cent and unemployment rose to 20 per cent of the

work force in 1981. Capital account liberalisation was reversed as part of the policy response

to the debt crisis. Tight fiscal policy, privatisation, increases in tariffs, debt conversion and

rebuilding of the financial system around an autonomous central bank formed the other

elements of the policy strategy. The overall reform process led to resumption of real growth,

decline in inflation, fiscal and external current account surpluses, decline in external debt and

a steady increase in international reserves during the nineties.

27



Mexico's approach to liberalisation of capital account was in an environment of stable

growth. Mexico had a tradition of a relatively open capital account from the mid fifties.

Rapid industrialisation had occurred under protection. Sound macro economic policies,

particularly prudent fiscal policy yielding low public sector deficits, cautious monetary

policy keeping inflation moderate, wage indexation and a fixed exchange rate provided the

environment for a strong growth of real GDP. Capital inflows mostly took the form of

foreign direct investment, changing in favour of commercial credits in subsequent years. The

oil boom of the seventies triggered expansionary fiscal policies which, in the context of a

fixed exchange rate, led to the currency being overvalued. With the current account deficit

rising to nearly 8 per cent of GDP in 1976 and a pari passu increase in external debt to 50 per

cent of GDP, there was sizeable capital flight which aggravated the crisis of 1982. Exchange

controls were reimposed in 1982 and quantitative restrictions were applied to imports as part

of the measures to counter insolvency. Since May 1989, liberalisation of capital account has

been pursued selectively. Although capital inflows resumed, the weakness of the initial

conditions, in particular, the overvaluation of the exchange rate remained camouflaged under

surpluses in the budget and in the external current account, and these weaknesses were

exposed in the crisis of 1994. Subsequently, Mexico has been able to make significant

progress in financial sector reforms, fiscal consolidation and inflation control.

2.2 The Preconditions for CAC

A survey of the selected country experiences shows that while some countries such as

Malaysia, Korea and Thailand approached the liberalisation of capital transactions by

undertaking reforms to strengthen certain preconditions, others such as New Zealand,

Mexico, Argentina, the Philippines and South Africa undertook capital account liberalisation

as part of a broader package of reform and preferred to establish the preconditions

28



simultaneously with the opening up of the capital account. For countries such as Chile and

Indonesia where capital account liberalisation was initiated much before the institution of

other reforms, the relatively open capital account acted as a catalyst for policy action towards

entrenching the preconditions.

For all the selected countries, fiscal consolidation and financial sector reforms were assigned

priority among the preconditions. While countries in the Asian region (Malaysia, Thailand,

Indonesia, Korea and Philippines), New Zealand and South Africa placed emphasis on

bringing down inflation to manageable levels either prior to or concomitantly with the

opening up, countries in the Latin American region except Mexico undertook strong policy

action to reduce inflation only after hyper-inflation emerged. Exchange rate management was

in general structured around a stable nominal exchange rate. In countries where the exchange

rate was used as an anti-inflationary tool, real appreciation was a significant factor in

weakening the preconditions. Even for those countries which did not use the exchange rate as

an anchor for inflation but attempted to maintain exchange rate stability through aggressive

interventions and sterilisations in the face of capital inflows, incipient overvaluation was

unavoidable. While Argentina, Thailand, Mexico and Malaysia allowed current account

deficits to widen and accommodate strong capital flows as well as the pressure of domestic

demand, other countries undertook policy action to strengthen the balance of payments.

Capital flows coming in the wake of opening up were, in general, absorbed into the reserves

which, except for South Africa, were built up to exceed the traditional norm of three months

of import cover.

2.2.1 Fiscal Consolidation

Among the countries which undertook CAC early, Indonesia, given its history of large fiscal

deficits, moved to fiscal consolidation fairly slowly. Throughout the seventies and eighties

29



the fiscal deficit was expanded, buoyed first by the oil windfall and then by the need to

provide fiscal stimulus to an economy in adjustment. It was not until 1989-93 that fiscal

prudence in the form of cutting expenditures, widening the tax base, postponement of capital

intensive projects and restraint on spending on state-owned enterprises began to yield low

and manageable fiscal deficits.

In contrast, Chile which also began liberalising capital transactions in the early seventies,

embarked upon fiscal consolidation almost simultaneously. By 1975, the fiscal deficit was

cut to 1 per cent of GDP. Throughout the exchange rate based stabilisation period (1978-8 1)

and the debt crisis of 1982 fiscal consolidation was well under way and tight fiscal policy

was pursued to revive domestic saving although in the face of a relatively fixed exchange

rate, this allowed for overvaluation to build. Since the recession of 1983, the public sector

has generated surpluses consistently. Fiscal consolidation has provided the bedrock of the

reform process in Chile in 1980 and in the nineties.

Malaysia represents the example of an economy with entrenched preconditions prior to the

opening up of the capital account. Throughout the sixties and seventies a balanced budget

and a net creditor position of the government vis-a-vis the central bank marked the conduct

of fiscal policy. While expansionary fiscal policy was used to counter the weakening of

external demand during the recession of the early eighties and the fiscal deficit rose to 17 per

cent of GDP in 1982, this policy stand was soon reversed through expenditure restraint and

retrenchment of public investment. The strong fiscal adjustment pursued since the mid-

eighties contributed significantly to strengthening the preconditions. With the overall public

sector finances turning into surplus in the nineties, prepayment of foreign debt and

sterilisation of the monetary effects of capital inflows strengthened the measures of fiscal

consolidation.

2.2.2 Financial Sector Liberalisation and Reform

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Countries such as Chile, Argentina, Indonesia and Malaysia embarked upon liberalisation of

the capital account in the seventies and eighties against the backdrop of financial repression.

In Chile, interest rate ceilings were removed and non-banks were provided a relatively open

market; however, financial intermediaries remained relatively restricted and were

discriminated against in the ability to intermediate in foreign funds. As a result of real

interest rates being high and an absence of supervisory competence many banks accumulated

bad loans, eventually leading to the crisis of 1982. It was only in the aftermath of the crisis

that prudential norms, deposit insurance and recapitalisation of the financial system was

undertaken, supported by capital market reforms. Argentina's experience was similar in that

financial repression in the form of ceilings on domestic interest rates and quantitative ceilings

on external borrowings were removed simultaneously. In the absence of proper supervision

and a lack of credibility in the Government's control of inflation, real interest rates rose

leading to capital inflows, with real appreciation precipitating capital flight, loan defaults and

banking crisis. While in the post 1991 phase, financial reforms have been implemented in

consonance with the Currency Board, the vulnerability of the financial system remained a

fundamental weakness in Argentina's approach to CAC. Mexico's experience was similar in

that the neglect of financial sector reforms in the first phase of capital account liberalisation

precipitated the crisis of 1982. During 1982-88, there occurred financial disintermediation

reflecting the highly regulated financial system. Major financial sector reforms took place

late in the process i.e. during 1989-1991, when it became apparent that the efficiency of the

financial system lagged in the liberalisation process. Reserve requirements were eliminated

in favour of open market operations and controls on interest rates and maturities were

eliminated. Development banks and trust funds were restructured as rediscounting

institutions to enhance their complementarity with commercial banks.

2.2.3 Banking Crises

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The incidence of banking crises in the eighties and nineties in developing countries has been

significantly higher and far more severe than in preceding decades. Policy makers in

emerging economies have discovered in the nineties that spots of vulnerability in the defense

against speculative attacks on the exchange rate were not fiscal deficits but potential quasi-

fiscal deficits lodged in banking systems. A factor behind the banking crises is the volatility

in international interest rates and real exchange rates induced by private capital flows.

Fluctuations in interest rates have affected the cost of borrowings for emerging markets and

altered the relative attractiveness of investing in these markets. Real exchange rate volatility

has caused currency and maturity mismatches, creating large losses for bank borrowers. In

the Mexican crisis of 1994, the gap between Mexico's liquid banking liabilities and the stock

of foreign exchange available to meet these liabilities in case of a run widened progressively.

On the eve of the crisis, the dollar value of M2 was almost five times higher than the

maximum value of international reserves the country had ever recorded. In Chile, the gap

was one half of that of Mexico and thus it was much less vulnerable to attack. Furthermore,

large capital inflows have led to lending booms and unsound financing during the

expansionary phase. Accumulation of bad credit risks and swings in asset prices then cause

the bubble to burst and intensify the crisis.

When domestic interest rates are high, the temptation for the banking system and bank

customers to denominate debt in foreign currency is strong. Such strategies can come unstuck

when devaluation occurs. Between December 1993 and December 1994 the foreign currency

denominated liabilities of Mexican banks more than doubled; at the same time the credit risk

on these loans increased as interest rates rose and as economic activity fell.

In general, the banking crises are precipitated by inadequate preparation for financial

liberalisation as witnessed in Chile, Indonesia and Mexico, with the government taking over

32



the troubled banking system in 1982 in Mexico. Rapid rates of credit expansion coincided

with high interest rates in the wake of financial liberalisation. Lifting restrictions on bank

lending and lower reserve requirements permitted banks to accommodate pent up demand for

credit in liberalised sectors. Furthermore, new competition and easy access to offshore funds

allowed banks to undertake risky activities. In the absence of strong supervisory and

regulatory frameworks, therefore, financial liberalisation can trigger banking crises.

2.2.4 Inflation Control

The commitment to hold down inflation has varied. In the hyper-inflationary environment of

Latin America, explicit inflation strategies have been weakened by loose macro economic

policies although in the recent period the commitment to inflation control has been strongly

reinforced through adoption of the Currency Board in Argentina, autonomy to central banks

and explicit inflation goals. In the Asian countries, there has all along been a supportive

environment of moderate inflation. Nevertheless, tight monetary and fiscal policies have

contributed to holding down inflation at low levels. In New Zealand, an explicit inflation

mandate has been tied to the autonomy of the central bank.

In Chile, on the eve of the first phase of capital account liberalisation (1974-81), inflation had

reached an annual rate of 600 per cent. Restrictive monetary and fiscal policies impacted

upon inflation so that after remaining inertial in the first two years following liberalisation,

inflation declined to .37 per cent in 1978. Thereafter, the exchange rate became the primary

focus of the anti-inflation programme. A system of pre-announced depreciation of the

nominal exchange rate (tablitas) was introduced, followed by a fixed nominal exchange rate.

Mandatory indexation of wages and the open capital account helped to keep inflation in the

33



range of 20 per cent over the eighties. The second round of capital account liberalisation

occurred alongside the establishment of an autonomous central bank in 1989 and tight macro

economic policies have ensured a decline in inflation to around 8 per cent in 1995. Since

1990, the central bank has publicly announced an inflation target and has shown a readiness

to raise interest rates when domestic spending has accelerated.

In Argentina, inflation was well above 100 per cent throughout the first phase of capital

account liberalisation crossing 3,000 per cent in 1989. The Law of Convertibility which came

into existence in 1991 established the Currency Board which, by linking the Peso to the U.S.

Dollar, attempted to anchor inflation at the level of inflation in the USA and broke the chain

of expectations fuelling hyper-inflation. The results were dramatic with inflation declining to

3 per cent by 1995.

2.2.5 Exchange Rate Policy

In the conduct of exchange rate policy, two clear strands can be distinguished among the

selected countries: the Latin American type where the exchange rate, whether nominal or

real, performed as an anchor for the economy and the Asian type where exchange rate policy

is fashioned in a manner in which the balance of payments is targeted. While South Africa

can be placed close to the Asian type, New Zealand stands separately with its exchange rate

geared around a small open economy.

2.2.6 Balance of Payments

34



In general, countries have approached capital account liberalisation by using resultant capital

inflows to strengthen the balance of payments the exceptions being Thailand and Mexico.

In Chile, after a period of unsustainable current account deficits and an explosive increase in

external debt up to the early eighties, the authorities took steps to hold the current account

deficit within sustainable limits. The current account deficit narrowed steadily from 1985

onwards, turning into a small surplus of 0.2 per cent of GDP in 1995. Capital inflows were

absorbed into the reserves in the second phase of liberalization and at the end of 1995; the

reserves stood cover for 11 months of imports.

In Argentina, in the period 1992-95, the surge in capital inflows was accommodated by an

expansion in the current account deficit to around 3 per cent of GDP. In spite of the

expansion in the current account deficit the large capital inflows allowed for a rebuilding of

the losses of reserves which had occurred until 1989. Since 1990 there was a steady accretion

to the reserves which stood cover for 9.5 months of imports by the end of 1995.

Korea has adopted a cautious approach to the balance of payments. Large current account

deficits in the early eighties turned into surpluses in the late eighties on the strength of export

growth. In the nineties, current account deficits have reappeared but they have been

contained at below 2 per cent of GDP. Net capital flows have been used to build up the

reserves which stood at US $ 32.6 billion or three months of imports at the end of 1995.

2.2.7 Timing and Sequencing of CAC in Selected Countries

Among the selected countries, Chile, Malaysia, Thailand, Korea and Mexico approached the

liberalisation of capital transactions in a gradual, phased approach, along with broader

financial sector reforms, and macro economic policies were oriented to establishing the

preconditions for attaining CAC. In Mexico, however, financial sector reform occurred late

35



exchange deposits. Capital repatriations were liberalised in 1992. Domestic commercial

banks were authorised to grant trade credits to other Latin American countries and the

proportion of export proceeds exempted from surrender requirements was raised.

Furthermore, measures were adopted to moderate capital inflows by the imposition of a

stamp tax, non-remunerative reserve requirements and size restrictions and rating

requirements for Global Depository Receipts issued by residents.

In South Africa, the unification of dual exchange rates was supported by the announcement

of measures of capital account liberalisation, which virtually ended capital controls on non

residents. Contrary to the Plan, the relaxations could not be carried further following a run on

the Rand. South Africa postponed the elimination of controls on residents' capital outflows.

Subsequently, the following exchange control relaxations were announced in March 1997. (i)

South African corporates are allowed to transfer up to R 30 million from South Africa to

finance approved investments and South African corporates with projects abroad are

permitted to borrow abroad. (ii) South African corporates are permitted to invest a percentage

of their assets abroad for portfolio investments. (iii) Qualifying South African institutional

investors were permitted to invest offshore up to 3 per cent of their inflow of funds in the

previous calendar year. Similarly, in 1997 offshore investment of up to 3 per cent of the net

inflow of funds for the calendar year 1996 would be permitted, subject to an overall limit of

10 per cent of total assets. Additionally, subject to the overall limit of 10 per cent of total

assets, an extra 2 per cent of the net inflow of funds for the calendar year 1996 could be

invested in securities on stock exchanges in certain countries in southern Africa. (iv) From

July 1, 1997 registered tax payers in South Africa would be permitted to invest a limited

amount of capital abroad. Such persons may alternatively hold foreign currency balances

with banks in South Africa within a defined limit. (v) US $/Rand futures are being introduced

in the South African Futures Exchange. Participation would initially be restricted to non

38



residents and authorised dealers in foreign exchange. Residents would be allowed access

only through authorised dealers. (vi) Documentation requirements for forex transactions are

being significantly curtailed for transactions of R 40,000 or less as against R 2,000 earlier.

This is expected to reduce some 60 per cent of the workload associated with implementation

of exchange control requirement.

2.3 Developments Following Liberalisation of Capital Accounts

The initial impact of the relaxation of capital controls has, in general, been reflected in the

balance of payments. While the elimination of controls on inflows has expectedly resulted in

large positive entries in the capital account of the balance of payments, the elimination of

controls on outflows supported by appropriate financial policies, far from putting a pressure

on the balance of payments has generated confidence and drawn a further surge in capital

inflows. Apart from initial attempts of capital account liberalisation in Chile, Argentina and

Mexico which were against the backdrop of inconsistent macro economic policies and weak

financial systems, all.. the selected countries which took steps towards CAC recorded overall

improvement in the balance of payments. Argentina reversed a long period of overall deficits

to record large overall surpluses in 1992 and 1993. It was only in the fall out of the Mexican

crisis that overall deficits reemerged in the Argentine balance of payments in 1994 and 1995.

For Mexico, the impact of capital account liberalisation was equally dramatic. Overall

deficits recorded since 1982 were reversed into large surpluses immediately after capital

account liberalisation in 1989, and resurfaced only in the face of the crisis of 1994. In

Indonesia, the experience has been uneven; however, since 1989 strong capital flows have

ensured consistent surpluses in the overall balance of payments. A similar experience is

recorded for the Philippines since 1991. Malaysia has had a history of buoyant capital

inflows which turned into surges since 1989. The overall balance moved into surplus

39



reaching a peak of US $ 11.3 billion in 1993 before turning into a deficit in the following

year, reflecting controls on capital inflows imposed in the wake of exchange market turmoil.

Thailand has recorded overall surpluses since 1984 and since 1988 these surpluses were

large. For Korea, large surpluses in the overall balance of payments have been recorded over

the eighties especially in the latter half. Since 1992, capital inflows have resulted in massive

overall surpluses which peaked at US $ 7.7 billion in 1995. New Zealand stands out as an

exceptional case where overall deficits have been consistently recorded in the balance of

payments except in 1995. In South Africa, a brief period of overall surpluses was reversed in

1993 when South Africa returned to the international economic mainstream. In the following

years there was a resumption of strong capital inflows which generated large surpluses in the

overall balance of payments. In early 1996, inability to cope with capital inflows ultimately

turned into a confidence problem leading to run on the Rand.

6. Preconditions and Roadmap to CAC

In terms of macroeconomic policy, fiscal consolidation, an independent monetary policy

based on indirect policy tools and a more flexible exchange rate regime are all-important

conditions for a successful liberalization effort. In India system of automatic monetization of

the fiscal deficit that was replaced by a system of ways and means advances early in the

reform process. “Fiscal Responsibility Act” is in the advanced stages of drafting and is

expected to pass the Indian parliament. Similarly, in Uganda the reduction of the fiscal deficit

and its financing in a non-inflationary manner since was a key precondition of capital

40



account liberalization. In terms of exchange rates, its important to transform fixed, multiple

exchange rate regimes into floating unified-rate systems. Capital account liberalization

probably spells the end of fixed exchange rate regimes since their viability is often

underpinned by capital controls. Furthermore, fixed rates can encourage short-term,

unhedged borrowing in foreign currency that can precipitate a crisis (note the genesis of the

Thai crisis in the fixed rate regime and the liberalized access to short-term borrowing from

abroad). Fixed rate regimes and the consequent loss of monetary policy independence also

make it difficult for a country to control a domestic economic boom resulting from

tendencies to over-invest and over-consume. Floating rates, however, create a problem for

country’s seeking to generate nominal anchors for the domestic price level. In moving

towards capital account convertibility, governments must also ensure that inflation, the

current account balance and foreign exchange reserves are maintained at acceptable levels.

Any one of these variables can prompt a financial crisis if it is allowed to move seriously out

of line and undermine confidence in the currency. The inflation objective can be aided by the

creation of a strong, independent central bank that is relatively insulated from more populist

pressures emanating from the political process. Maintaining adequate foreign exchange

reserves becomes less pressing if floating rates are adopted, but it is important for the central

bank to have funds to intervene in the market to promote stability and reduce volatility and

also for the psychological reassurance it provides to foreign investors. One of the key

messages to emerge from the conference is the central importance of financial sector reform,

prudential norms and effective regulatory supervision. This is an area that is gravely deficient

in many developing countries. Perversely, capital account liberalization in several countries

has actually worsened the situation since it has led states to retreat from effective regulatory

oversight, information gathering and the enforcement of prudential norms for fear that they

will be seen as the first step in a return to state control. However, as numerous crises have

41



made clear, in an environment of liberalized capital flows, weaknesses in the financial system

can cause great macroeconomic instability and crises. The choice is therefore between a

careful reform of the financial system before or during the process of liberalization or

emergency reforms after a crisis. The inexperience of many agents in the financial sectors of

developing countries can lead them to become overexposed to interest rate of exchange rate

risk. Thus, the authorities’ ability to develop prudential norms and then create the

information and enforcement systems to support them are central to financial sector reform.

The key reforms in the financial sector and the need to integrate different segments of the

financial market are key pre-conditions to liberalization of the capital account. Uganda

pursued a financial sector reform programme before formally opening the capital account.

Key aspects of this programme included removing interest rate controls, the dismantling of

entry barriers to new banks, restricting the direct role of the government in allocating

financial resources and strengthening bank supervision. The continuing problems of

obtaining information on agents in the financial market (particularly with regard to inflows)

and the issue of guarding against the exposure of the non-bank sector to exchange rate risk.

In India early in the reform process, the Narasimhan Committee recommended the

deregulation of the banking sector, greater use of open market operations in monetary policy,

the deregulation of interest rates and the widening and deepening of financial markets. As an

example of the kinds of prudential limits

imposed by the central bank, Indian banks can invest abroad up to 15% of total deposits,

while beyond this threshold they must obtain approval from the central bank. Similarly, for

corporates, working transactions are reported through banks but capital transactions must be

permitted by the central bank. In India, the process of liberalization has been one of “mutual

education” between the central bank and market participants – there was a mutual process of

discovering what appropriate standards are and where it is most effective to regulate.

42



Tarapore Committee on capital account convertibility, appointed by the Reserve Bank of

India, has emphasized improvement of Indian financial system vis-à-vis banking system to

affect capital account convertibility. The signposts and preconditions for capital account

convertibility included a number of issues relating to the banking system. Thus it is a

challenge before the banking system to achieve the level of efficiency within the time-frame

prescribed by the committee.

The terms of reference of the Committee are as follows:-

• Review the international experience in relation to Capital Account convertibility

(CAC) and to indicate the preconditions relating to CAC.

• Recommend measures for achieving CAC.

• Specify the sequence and time frame for such measures.

• Suggest domestic policy measures and changes in institutional framework.

The major preconditions and signposts mentioned in the report are as follows :

Fiscal Consolidations

• Reduction in Gross Fiscal Deficit as percentage of Gross Domestic to 3.5 .

• Introduction of Consolidated Sinking Fund.

• Introduction of a system of fiscal transparency and accountability on the lines New

Zealand Fiscal Responsibility Act.

43



Mandated Inflation Rate

• The mandated rate of inflation for the 3 year should be an average of 3% to 5%.

• RBI should be given freedom to attain the tarred mandate of inflation approved by the

Parliament.

• There should be clear and transparent guidelines on the circumstances under which

the mandate could be changed.

Strengthening of Financial System

• Interest rates to be fully deregulated and any formal or informal interest rate controls

to abolished.

CRR be reduced in phases to 3%.

• Non-Performing Assets as percentage to total advances to be brought down in phases

to 5%.

Imp Macro-Economic Indicators

• A monitoring band of +/-5% around the neutral Real Effective Exchange Rate

(REER) to be introduced and intervention by RBI to be ensured when REER is

outside the band.

• REER band to be declared published contemporaneously and changes made in neutral

REER made public.

• Debt service ratio to be reduced to 20%.

• A minimum Net Foreign Assets to currency ratio of 40% to be stipulated by law in

the RBI Act.

44



• External sector policies should ensured a rising trend in the ratio of current receipts to

cross domestic product.

• The ratio of current account deficit to GDP should be even.

• The Foreign Exchange Reserves should not be less than 6 months of imports.

• Reserves should not be less than 3 months of imports plus 50% of debt service

payments plus one month's export and import leads and lags.

• 100% mark to market valuation of investments for banks.

• Best practices for forex risk management banks.

• Banks to follow international accounting and disclosure norm

• Capital prescription to be stipulated for market risk.

The Committee has elaborately framed timing and sequencing of current account

convertibility.

7. Present Condition in India

Indian Rupee is convertible, i.e., it is convertible on “current account” and nonconvertible on

“capital account”. This partial convertibility was brought in August 1994 by RBI circulars.

• Rupee rates in the forex market are market determined and not RBI prescribed.

45



• Most of the transactions for inward foreign investment are liberalized. For

outward investments, up to U.S. $ 15 million, automatic permission is available.

Larger outward investments are also permissible if one can satisfy RBI about the

project

• Speculation in Forex is not free

• Forex dealing in India can be done by “authorized persons” only

Liberalization of capital flow has been substantial but gradual. Having accepted Article VIII

status of the IMF with respect to current account convertibility in August 1994, a framework

for capital account convertibility was sought to be achieved in a phased manner. The

committee on Capital Account Convertibility, with Dr. S. S. Tarapore as Chairman,

submitted its Report in May 1997. The Committee observed that although there were benefits

of a more open capital account, international experience showed that a more open capital

account could also impose tremendous pressures on the financial system. Hence, the

committee indicated certain signposts or preconditions for capital account convertibility in

India. The three crucial preconditions were fiscal consolidation, a mandated inflation target

and above all, strengthening of the financial system. The committee recommended a

reduction in Gross Fiscal Deficit / Gross Domestic Product ratio from 4.5 per cent to 3.5 per

cent in 1999-2000 and a mandated rate of inflation for the period 1997-98 to 1999- 2000 at

an average of 3 to 5 per cent. In the financial sector, the time frame for signposts that were

recommended was in terms of cash reserve ratio (CRR) and non-performing assets (NPAs).

The recommendations were to reduce gross NPAs of banks as a percentage of total advances

from 13.7 per cent in 1996-97 to 9 per cent by 1998-99 and to 5 per cent by 1999-2000, and

the average effective CRR from 9.3 as of April 1997 to 3 per cent by 1999-2000. The

committee then felt that the preconditions could be satisfied in three years, and therefore, it

46



adopted a three-year time frame for CAC. A basic dictum of the Committee was that the

timeframe for implementation of the measures could be shortened or elongated in accordance

with the performance on the preconditions and that attainment of preconditions and

implementation of measures should be considered as a simultaneous process. A significant

feature was that the committee did not recommend unlimited or open CAC, but preferred a

phased liberalization of controls on outflows and inflows over a three-year period. It may be

noted that as per the committee’s recommendations, even at the end of three-year period,

capital account will not be fully open and some flows, especially debt would continue to be

managed. Most of the measures related to removing the controls on outflows more than

inflows. Specifically, it addressed issues such as investment abroad by Indian Joint

Ventures/Wholly Owned Subsidiaries; retention of earnings by exporters/exchange earners;

investment by individual residents in assets in financial markets abroad; and more liberal

limits for banks in regard to borrowing and deployment of funds outside India. In addition,

the Committee addressed the issue of proper governance and transparency, and the need to

develop and gradually enable integration of forex, money and securities markets. It would be

useful to assess the current status with regard to both the measures and the signposts

recommended by the committee. The monetary policy of October 1997 implemented some of

the recommendations of the committee. These included, increasing the retention portion of

exchange earning in the foreign exchange account to 50 per cent, dispensing with prior

approval from the RBI for execution of projects abroad, permitting ADs to undertake

forfeiting of medium-term export receivables, allowing corporate entities to open offices

abroad without the need for prior approval from the RBI, providing credit/non-credit

facilities to joint ventures abroad and permitting SEBI registered Indian fund managers

including mutual funds to invest in overseas markets subject to individual and total overall

caps. Permission was also granted to banks fulfilling certain criteria to import gold for

47



domestic sale. Recently, FIIs have been permitted to invest in Treasury Bills. They are also

permitted to cover in the forward market their entire exposure in the debt market. FIIs can

now to cover up to 15 per cent of their equity exposure in he forward market and 100 per

cent of their incremental investments after June 1998. The roadmap for further liberalization

of capital account will have to be built over the progress so far, domestic and international

developments. The current approach can be summarized as under:

(a) Between the preconditions and the time frame for CAC recommended by the committee,

it is clear that the achievement of preconditions has emerged, as perhaps intended, the more

important criterion for liberalising the capital account, while the timetable itself has lesser

significance.

(b) In the context of the East Asian crisis, the liberalization of capital account will also hinge

upon the establishment of an appropriate international financial architecture.

(c) The East Asian crisis has vindicated the committee’s stand with regard to preconditions

and there is need, if at all, to further refine and detail the preconditions to capture the recent

experiences.

(d) The measures for liberalising capital account need to be kept under continuous review,

would warrant some repackaging and in any case, to be cautiously implemented.

Conditions Favoring CAC in India

An effective CAC regime requires sound backing of the economic fundamentals. Let us see

how they stand in the Indian context.

• Liberalization of the economy will make it easier for the Indian Rupee to move

towards CAC.

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• Comfortable forex reserves of around $70 b will provide the much-needed backup

against capital flight.

• Inflation has been more or less under control for last couple of years and

maintained well below prescribed by Tarapore committee.

• Considerable movement in financial sector reforms that include ushering of

derivatives and rolling settlements, allowing FDI and FIIs in more sectors.

• Gold regime has been liberalized

• Exchange policy has been made more flexible.

• With introduction of Securitization Bill 2002 banks will be in a better position to

maintain their NPAs

• CRR requirements have come down considerably which is a precondition for CAC.

Hindrances in India towards CAC

Though there has been a lot of talk of introducing CAC in our country for years now, we

have still not been able to put it firmly in place. There have been a lot of hindrances towards

bringing about a CAC regime, which are enumerated as follows:

• High Fiscal Deficit

• Fear of Rupee Devaluation - With the introduction of CAC, the Rupee is bound to

undergo devaluation, which does not carry well with many sections. Though the recent

performance of Re against the dollar augurs well to alleviate this historic fear.

• Current Account Convertibility still not in place - Despite the official claims to the

contrary, we still find no current account convertibility. Walk in into a bureau of

exchange in, say, Delhi and ask to change Rs. 1,000 into pounds. You will typically be

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given a booklet of rules, an A2 form and asked for proof that you are taking the pounds

for legitimate purposes.

8. Approach to Convertibility

A persistent debate among economists has concerned the relative merits of a more rapid

transition to a open capital account (the so-called “big bang” approach) and a more

deliberate, gradualist approach which emphasises reforms in the real economy and financial

system and liberalising the current account before opening the capital account. An advocate

of the former position has been MIT economist, Rudiger Dornbusch, who argues that since

resources are lost through obstacles to free capital flows (as with any protectionist policy) the

sooner it is liberalized the better. The latter view, which commands a major following,

stresses the instabilities generated by financial liberalization before adequate institutional

safeguards are put in place. It is, therefore, seen as advisable to move from reforms in the real

sector, improved financial regulation and current account liberalization before finally

liberalising the capital account.

The case studies of India and Uganda are examples of the “gradualist” and “big bang”

approaches. India pursued an incremental and phased liberalization process in the aftermath

of the 1991 balance of payments crisis. Within a broad liberalization process, emphasis was

placed upon introducing a market-determined exchange rate, containing the fiscal deficit,

reforming the system of industrial licenses, placing bounds on the current account deficit and

liberalising current account transactions. Capital account transactions remained tightly

controlled and monitored. Non debt-creating flows were encouraged and short-term

commercial borrowing remained restricted while capital outflows were only gradually

liberalized. Uganda followed a more rapid transition to capital account convertibility. It is

important to note however that the inability to enforce capital controls ensured that the

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capital account was de facto open long before the de jure announcement of full convertibility

in July 1997. The Ugandan capital account

regime has been noticeably looser than its Indian counterpart, allowing, for example, both

residents and non-residents to hold foreign exchange denominated accounts in the domestic

banking system. Uganda has been successful in attracting foreign capital inflows, primarily

in the form of foreign direct investment, which is more stable than either portfolio or loan

flows. However, Uganda’s strategy remains a risky one insofar as the country is in a

politically unstable region and where countries remain vulnerable to potential contagion from

South Africa. Thus, given the potential benefits and costs of capital account liberalization

and the fact that the underdeveloped institutional structure (primarily in the financial system)

of developing countries heightens the risk of crisis, the balance of the evidence suggests that

countries should adopt a gradual movement towards capital account liberalization within a

broad reform effort. IMF stresses that it has never advocated an immediate dismantling of

capital account restrictions and that, furthermore, it has no authority over capital account

restrictions. Capital account convertibility is a learning process and that countries should

“liberalize a little, learn, and then liberalize more”. It was preferable to achieve liberalized (or

substantially liberalized) current account transactions before moving on to opening up the

capital account. At the same time, the sequencing of current and capital account

simultaneously is also important as capital can leave the country with leads and lags through

the current account.

9. Impacts of Capital Account Convertibility on Banks

For the success of the current account convertibility a lot depends on the strength and

financial consolidation of the banking system. The impact of current account convertibility

would be the most on the financial system of the country. The impacts of the phased changes

51



in the policies regarding the banking system to bring about capital account convertibility are

discussed below:

Total Deregulation of Interest Rates

The Committee has recommended total deregulation of interest rates i.e. total transparency to

ensure non- existence to formal or informal interest rate control, in the current financial year.

The measure of withdrawing of interest cap is expected to trigger off deposit rates war

among public sector, foreign and private sector banks.

Scheduled Plan to Bring Down NPAs

The Committee has suggested time-bound plan for reduction of NPAs of the banking system

to enable it face international competition. The targets for reduction of NPAs as percentage

of total advances are set at 5%. It has also recommended a comprehensive banking legislation

and an enforcement machinery to reduce the quantum of NPAs and ensure this framework to

prevent future defaulters. With other costs and returns remaining unchanged the spreads

available to the banking system is estimated to increase by 1.8%.

Restricting Growth of Weak Banks

Strengthening of financial system being the most important precondition for capital account

convertibility, the Committee has suggested monitoring of the growth of weak banks so as to

temper the impact of its growth on the banking system. The Committee has suggested to

convert the weaker banks into `narrow banks' observing that the weaker banks are growing at

52



a faster rate than the banking system. These `narrow banks' observed that weaker banks are

growing at a faster rate than the banking system. These `narrow banks' are advised to restrict

their incremental resources only to investments in government securities, restraining their

liability growth.

Stringent Imposition of Capital Adequacy Norms

The Committee has recommended considering the imposition of even more stringent capital

adequacy norms than the Basle norms as the risks faced by financial sector are much higher

in developing countries. It noted that prudential norms should emphasize necessary safeguard

to enable the banks in system to attain the international standards instead of enabling the

weakest segment of the financial system a cushion for survival. It has also suggested that the

supervisory system should be in a position to take quickie, strong and deterrent actions in

cases of inadequacies or deviations from norms.

Liberalization of Gold Trade

The Committee has noted that the liberalization of gold regime is necessary before moving

towards capital account convertibility. It has also suggested to allow Indian entities into the

international commodity markets. Banks and financial institutions fulfilling defined criteria

have been suggested to be permitted to operate freely in the domestic and international

markets. This would augment sale of gold to residents, gold denominated deposits and loans,

mobilization of household gold and working capital gold loans to jewellery manufacturers

and deposits schemes like gold accumulation plans.

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Cut in Cash Reserve Ratio

The Committee has recommended a progressive reduction of average effective cash reserve

ratio to 3%. This reduction in CRR is expected to release Rs.35,000 crores into the banking

system over a 3-year period. This would reduce the lending rates as the cost of funds will be

reduced to a great extent, with the huge increase in the lendable resources; the banks would

be able to finance infrastructure sector in a big way.

The greatest impact of the capital account convertibility would be felt in the banking sector.

Total deregulation of the interest rates would instill greater competition in the circle. The

weaker banks would further be cornered as `narrow banks`. NPAs reduction would be at

focus of attention of banks which would help regaining of its financial health. Margin of

banks would be under pressure, infusing adequate asset liability management system in the

banks. However, banks will have much more liberal limits for borrowing and deploying

funds outside India. Indian banking system should surge ahead in this occasion and accept

the challenge by eradicating its weak points and consolidating its financial health.

10. Conclusion

• The forces leading to globalization and moves towards greater liberalization of capital

account transactions are irreversible. Capital account liberalization is not a choice. It is part

of prudent policy to work out an orderly opening of the capital account instead of reforming

under duress once a crisis has hit the economy. Many capital control regimes in developing

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countries also failed to prevent balance of payments crises from developing and inhibited

access to international financing and diversification.

• While liberalization is generally beneficial; it also greatly heightens a country’s

vulnerability to reversals in capital flows that can precipitate severe currency and balance of

payments crises.

• The risks inherent in capital account convertibility thus justify a gradual approach to

liberalization. Gradualism also allows time for the learning curve in developing countries. It

is important that countries focus on the preconditions for liberalization. Especially prominent

among these are fiscal balance, the right mix of instruments to manage capital flows,

exchange rate policy and financial sector reform.

• Liberalization of the controls on the current account combined with a relatively closed

capital account leads to the loss of capital through leads and lags in the current account.

Some restrictions on the current account are needed in the transition phase to give the

country time to reform without dealing with the problem of capital flight through this

channel. The decision to open up the capital account because of pressures introduced by the

opening of the current account is a poor policy decision.

• Capital account liberalization requires that central banks have effective regulatory,

supervisory, enforcement and informational structures in place. Liberalization must not be

seen as requiring the authorities to retreat from these essential functions.

• The need to regulate short-term flows arises from the inability of financial systems in

developing countries to intermediate capital from the short-end to the long end and cannot

therefore bear the risk of financial intermediation. The management and monitoring of short-

term inflows must be a central concern.

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• Authorities must be concerned not only with the foreign exchange exposure of the

financial system but also that of the non-bank private sector. Experience has shown that these

“hidden” exposures can be a prime source of national exposure to currency deprecations.

• The composition of capital flows must also be closely monitored. FDI flows are in general

more costly but also more stable and beneficial to development. At the other end of the

spectrum, short-term borrowing is highly volatile and more likely to underwrite consumption

rather than productive investment. Capital account liberalization helps but is not necessarily a

decisive factor in encouraging greater FDI inflows.

• Capital controls must be viewed pragmatically. Many controls are inefficient and

ineffective. However, a distinction must be drawn between these controls and controls that

serve a prudential function. In particular, authorities wishing to limit exposure to sudden

capital reversals must consider some quantitative restrictions and controls on short-term

flows such as those in Chile. Price controls on short-term flows are only effective in the

short-run in altering maturity transformation and provide monetary autonomy in the short-

run, they cannot be used to insulate monetary and exchange rate policy. Controls must be

carefully targeted to where they are most effective and must make distinctions between

various classes of agent (resident, non-resident, and bank, corporate, individual). In the

transition phase, restrictions on certain class of institutions, such as banks, pension funds and

authorized dealers are generally effective. Controls must not, however, be used to put off

essential reforms directed at structural imbalances and the financial sector.

• Foreign currency deposits in the domestic financial system are a source of instability and

central banks should make it a priority to reduce their level and enact regulations to

discourage them.

• Capital account convertibility increases both the costs and risks of maintaining a fixed

exchange rate regime and policymakers should move towards greater flexibility.

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• Greater transparency of central bank, financial sector and corporate balance sheets is a

desirable objective for developing countries. However, it should not be seen as a cure-all for

instability.

• Country experiences suggest that there are three strategies for opening the capital account

and that it is practical and feasible to be at different points along the spectrum leading to a

fully convertible capital account.

i. The opening up of the capital account based on distinctions between residents and non-

residents (an approach followed by India and South Africa). In both these cases the

assumption seems to be that outflow of capital by residents can cause a crisis since opening

up is more cautious for the resident sector. There is some basis for this. In the 1994 Mexican

crisis domestic residents moved out of Tesobonos first setting a signal for FIIs. However, as

country experiences shows that FIIs are equally likely to exit from a country based on their

perceptions about the economy

ii. Opening first the inflow side and later liberalizing outflows (same as (i)but the opening up

is not restricted between residents and non-residents.)

After liberalization of inflows and outflows, management of the open capital account with

the aid of price instruments (when required) that are designed to alter the maturity structure

of inflows and their impact on monetary and exchange rate policy (an approach followed by

Chile, Colombia and Malaysia). The experience of these three economies points to the

importance of overall supportive policies to make these controls work.

iii. A ‘big bang’ approach that simultaneously liberalizes controls on inflows and outflows

(an approach followed by Argentina, Peru and Kenya).

The country experiences described in this paper suggest that either option (i) or (ii) is

preferable for most developing countries. Each country has to decide on the degree of capital

account convertibility based on its own conditions. If a country decides on a given degree of

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capital account convertibility, over time it should move towards greater openness consistent

with its overall reform process.

• An international lender of last resort facility is unlikely to emerge in the near future. The

principles underlying a LOLR facility are problematic to implement at the international level

and the funds of the IMF are grossly inadequate to fulfill the task. The need to draw in

lending from advanced countries is uncertain and subject to political constraints.

• Workouts and bail-ins are a critical element in crisis resolution but are subject to moral

hazard since they allow lenders to escape without bearing a significant proportion of losses.

Moral hazard can be dealt with through (i) an international lender of last resort or the

imposition of capital controls, (ii) “middle way” solutions such as standstill agreements, and

(iii) the limited lender of last resort facility subject to pre-qualification. The emphasis upon

pre-qualification begs the question of what would happen in the case of a crisis in a

significant non-qualifying country.

• A payments standstill sanctioned by the IMF was a better solution since creditors would

incur a write-down in their assets and the claim on IMF financing would be restricted to

smaller amounts than in either the full or partial LOLR facilities envisioned in the other

options.

• Τ here is a clear need for gradualism and preconditions in laying a strong foundation on

which to base full convertibility. Without this foundation, the chances of a severe crisis are

greatly heightened. Each country should work out the degree of capital account liberalization

based on its own pre-conditions and move along the spectrum as the economy undergoes

reforms and enters a dynamic process of change and progress. Prudential limits and

regulation can be used to work out the transition phase. Experience reveals that a gradual

approach to capital account convertibility is an achievable and largely beneficial policy

objective for developing countries to pursue.

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References

1. Institute of International Finance (IIF), “Capital Flows to Emerging Market

Economies,” January 29, 1998.

1. Conference Report - Conference on Capital Account Convertibility: A Developing

Country Perspective (Overseas Development Institute)

2. Krugman, Paul, “What Happened to Asia?” MIT, January 1988

3. Speech by Y. V. Reddy at Forex Dealers Conference, Hyderabad, 1998

5. Key Note Address at the Assembly of the Forex Dealers' Association of India at

Bangalore on September 28, 2002 delivered by Smt K.J.Udeshi, Executive Director,

RBI

Internet References –

A. www.rbi.org.in

B. www.imf.com

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