Govt should frame rules on inbound capital flows

It also proposed unified regulator for RBI, Sebi, FMC and PFRDA, while keeping RBI out of it

The Financial Sector Legislative Reforms Commission (FSLRC) on Thursday recommended that the finance ministry frame the rules governing capital controls on inbound flows into the country, while the Reserve Bank of India (RBI) make regulations on outbound capital flows. It also proposed a unified regulator for RBI, Securities and Exchange Board of India (Sebi), Forward Markets Commission (FMC) and Pension Fund Regulatory and Development Authority (PFRDA), while keeping RBI out of it.

“The rules on capital account transactions for all inbound flows, including outflows that arise as a consequence of these inflows, will be made by the Centre in consultation with RBI. The regulations on capital account transactions for all outbound flows will be made by RBI in consultation with the government,” the Commission said in its report released on Thursday.

However, three out of 10 members of the commission have not given their asset to the proposal. K J Udeshi, P J Nayak and Y H Malegam  disagreed with the allocation of responsibilities on capital controls between the finance ministry and RBI.

Typically, capital controls include a range of measures from reserve requirements to quantitative limits, licensing requirements and outright bans.

At present, the Centre makes rules in consultation with RBI for current account transactions, and the central bank in consultation with the government makes regulations in relation to capital account transactions. Thus ,multiple bodies such as RBI, Sebi, FMC, Irda, and PFRDA regulate capital flows.

The commission, headed by judge B N Srikrishna, has argued that since imposition of controls on capital flows are essentially based on political considerations, rule-making must vest with the Centre.

In its draft Indian Financial Code, FSLRC has also proposed a single investment vehicle for investment in India, a sound legal process while making rules for capital account transactions and granting approvals; a framework for imposition of controls in emergency situations, review or restrictions on capital account transactions on national security considerations, and a principle that once controls are imposed at the entry level, there must be equal treatment for Indian investors and foreign investors.

The framework features a strong combination of independence and accountability for RBI in its conduct of monetary policy. The first stage lies in defining the objective of monetary policy.

“The finance ministry would put out a statement defining a quantitative monitorable ‘predominant’ target. Additional, subsidiary targets could also be specified, which would be pursued when there are no difficulties in meeting the predominant target,” it said.

The commission suggested a separate debt management office, arguing a central bank that sold government bonds faces conflicting objectives.