Capital controls on foreign investment may be eased

mumbai: with a $50 billion foreign exchange reserves cushion, the government is likely to relax capital controls on foreign investment by corporates and financial intermediaries. while corporates may be allowed to accquire companies or promote joint ventures overseas, financial intermediaries may be allowed to invest in liquid financial assets abroad. in the past the rbi had indicated that with regard to liberalisation of outlfows the hierarchy is corporates, financial intermediaries and individuals, though the tarapore committee preferred liberalisation of flows on individual account earlier in the heirarchy. the tarapore committee had also set signposts for capital account liberalisation which included low inflation, low fiscal deficit and low non-performing assets. of the three only inflation is within control at below two percent. non-performing assets are slightly higher than the signpost figure of 5 per cent at 6 per cent and the fiscal deficit is likely to be much higher than last year''s 6.2 per cent of gdp. however, in this context it may be mentioned that corporates have been lobbying strongly with the government for relaxtion in norms applying to setting up joint ventures or subsidiaries overseas. rbi on its part has been more liberal in allowing capital outflows when they are linked with inflows as against general outflows. as a result it has been relatively easier for foreign investors and software exporters to remit funds overseas. now old economy corporates want the same flexibility that is made available to software exporters to set up joint ventures and subsidiaries abroad. there is also a view that some capital accounts liberalisation would partially offset the monetary expansion caused by rising foreign exchange reserves. foreign exchange reserves have gone up by nearly us$ 4 billion in the past three months to cross $50bn this month. this means that the reserve bank of india has pumped in close to rs 9,600 crore by purchasing dollars from the market. rbi has been building reserves with the objective of meeting liquidity requirements as well as to have a cushion to meet unforseen shocks. the pace of reserve accretion has accelerated in the last few months. according to bankers, the funds released in the process is almost equivalent to a one percentage point cut in the cash reserve ratio. in the mid ''90s the reserve bank of indiaresponded to monetary expansion caused by foreign institution investor inflows by raising the crr requirement for banks. however, this time rbi does not have the same flexibility as it has committed to bringing down crr requirements further to 3 per cent.