India must finish the capital account reforms begun in 1991

Every capital control India maintains today is the descendant of a single idea: forex belongs to GoI, and citizens transact in it by permission. Fera 1973 criminalised that idea. Fema 1999 merely civilised it.

It was born of the same pre-1991 beliefs in nationalisation and licence raj, when the entrepreneur queued for licences and the wealth creator was a suspect. An economy aspiring to be the world's third-largest cannot be financed by a jurisprudence of bureaucratic approvals.

The 1991 reforms dismantled the licence but never fully dismantled the instinct. The question is no longer whether Indian capital crosses borders. The policy question is whether it does so transparently, predictably, and in ways that advance India's economic interests.


Calibrated controls served India well in the past. Through the Asian crisis, GFC and the taper tantrum, sequencing over speed preserved a stability that faster liberalisers lost. But the question before policymakers is not whether yesterday's architecture worked.

India's economic ambitions have expanded far more rapidly than its capital account architecture. Financing a Viksit Bharat will require sustained long-term and long-gestation investments. It is whether it can finance ambitions - capital markets among the world's largest, GIFT City competing as an international financial centre, and investment needs on a scale domestic savings cannot meet. Global pension, sovereign and insurance capital must become a strategic national resource. And such capital wonders: can I read the rules in advance and will they stay consistent?

On March 27, with the rupee sliding past ₹95 to a dollar, RBI capped banks' net open positions at $100 mn. On April 1, it barred banks from offering rupee non-deliverable forward contracts and prohibited the rebooking of cancelled contracts - 'With immediate effect, until further review'. The rupee recovered sharply within a day.

But within 12 weeks, the same regulator was dismantling adjacent restrictions to court the capital its measures had unsettled - suspending interest-rate ceiling on FCNR(B) deposits and opening repatriable rupee accounts to foreign individual investors. No trigger for imposition was published in advance. No reason for withdrawal is published now.

The objection is not that RBI acted. The objection is that nothing in Indian law told a single investor when it would act, on what threshold, or when it must stop. That is the real boundary question in capital account policy: not where the perimeter sits, but whether it moves by rule or by fiat. Discretion is priced into every rupee asset permanently, as a discount on India's word.

The issue is not trust in RBI. That trust has been earned over decades. The issue is whether greater rule-based clarity around exceptional capital account measures can further reduce uncertainty for long-term investors without diminishing the central bank's operational flexibility.

What would a rule-based philosophy require?

Published destination India's last official map of its own capital account is Fuller Capital Account Convertibility Committee of 2006 - and its final phase expired in 2011. Everything since has been administered by circular. A new committee should publish a path in which liberalisation expands steadily as stated macro-triggers - inflation, fiscal deficit, reserve adequacy, financial-sector health - are met, so that openness ceases to be an annual act of regulatory grace.

Use sharp tools With Press Note 3 guarding the strategic perimeter - recalibrated in March with defined ownership thresholds - every residual sectoral cap and approval route should expire on a stated date unless the GoI publishes reasons for its survival. The burden of justification must shift from the investor to the restriction.

Repair static anomalies LRS ceiling of $2,50,000 has stood still since 2015 while GDP, in dollar terms, has doubled - and the I-T Act now collects 20% at source on remittances for overseas investment: a capital control in everything but name, administered by the tax department. Ceilings that do not move with the economy are not prudence, they are neglect wearing prudence's clothes.

Codified emergency brake Crisis powers should stand within a statutory framework - bounded by a recorded trigger, a 90-day sunset unless renewed for reasons, exit criteria published at imposition, and a report to Parliament. The April measures satisfied none of these. Three months on, no law obliges anyone to say when they must stop.

India will need external capital on a scale, and it will be supplied only on the strength of promises that are structurally difficult to break. So, India's next capital account reform is about constitutional confidence in markets, institutions and citizens. The unfinished task of 1991 is to replace an architecture that manages suspicion with one that legislates trust.