What is trade and financial liberalisation? in English

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What is trade and financial liberalisation?

Trade and Financial Liberalisation

(i) There is large empirical literature suggesting that trade integration benefits a larger number and helps promote economic growth. In contrast, recent empirical research is unable to establish a clear link between financial integration and growth. There is therefore now a consensus among academicians and policy makers that trade liberalisation should take precedence over financial liberalisation.

(ii) The RBI approach makes a distinction among the different participants in order to assess, on an ongoing basis, the gains as well as the vulnerabilities of foreign currency exposures to the system. In the capital account, apart from the Government’s, there are three balance sheets that we take into account whether for residents or for non-residents: the balance sheet of the households, the corporates and the financial intermediaries. Although in theory, everything may be integrated, in our phase of development, definitely these three are distinct in terms of their immediate reactions to market forces. In particular, this approach recognises the need to put in place appropriate prudential regulation in regard to the financial intermediaries in so far as foreign currency transactions are concerned.

(iii) There is virtual unanimity that the currency mismatches of financial intermediaries is a major source of risks of financial integration which has to be mitigated by monitoring and regulations and furthermore, that currency mismatches in the corporate sector can also be a source of risk to the financial sector. Hence the advice to banks to monitor unhedged exposures of borrowers. I would rejig your memory a bit – at the Ninth Forex Assembly at Goa, the then Deputy Governor Dr.S.S. Tarapore had alluded to these risks saying ” banks and FIs cannot distance themselves from the risks taken by corporates as these risks can involuntarily devolve on the banks as their lendings to corporates can easily turn into NPAs”. Prudential regulations in the financial sector should not therefore be construed as capital controls.

(iv) This approach has been reflected in the recent liberalisation of the policy on external commercial borrowings. The whole process of permitting such external debt may be either through the automatic route or non-automatic route, but slowly the automatic route is being expanded and the non-automatic route reduced. The recent External Commercial Borrowing(ECB) policy makes clear distinction between corporates and financial intermediaries. Therefore, while corporates have been given freedom to borrow under automatic route up to $500 million per year subject to certain conditions, a different approach has been adopted for financial intermediaries in the interest of financial stability by regulating access to overseas borrowings and issue of guarantees.

(iv) Another example is in regard to overseas investments. To enable corporates to become global companies overseas investments up to their net worth is permitted under the automatic route. They can also access ECBs under automatic route to invest overseas. In regard to resident individuals, in order to provide a hassle-free facility to make remittances overseas to meet both current and capital account requirements, they have been allowed to remit on an annual basis US$ 25000/- on a mere declaration of the purpose.

Disclosure and Transparency Initiatives

(i) RBI has been transparent in making available, in public domain, appropriate data relating to forex market and those resulting from RBI operations in the foreign exchange market. RBI disseminates the daily reference rate which is an indicative rate for market observers through its website. The movements in foreign exchange reserves of the RBI are published on a weekly basis in the Weekly Statistical Supplement(WSS). WSS also carries data on exchange rates of rupee against some major currencies. The monthly Bulletin of RBI gives data regarding purchases and sales of foreign currency undertaken by RBI against the rupee. The data regarding the Balance of Payments and the External Debt profile of the country is put out on a quarterly basis. RBI has already achieved full disclosure of information pertaining to international reserves and foreign currency liquidity position under the Special Data Dissemination Standards (SDDS) of IMF.

(ii) With the concurrence of Government of India, RBI decided to compile and make public half-yearly reports on management of foreign exchange reserves for bringing about more transparency and also for enhancing the level of disclosure in this regard. The first such report with reference to September 30, 2003 was put in public domain through websites of both the Government of India and RBI in February 2004. The second report on foreign exchange reserves with reference to March 31, 2004 is now available at RBI website.

Institutional Development

(i) It has been well documented that the vast size of daily foreign exchange trading, combined with the global interdependencies of the forex market and payment systems involves risks stemming from settlement of forex trades on gross basis. Settlement of forex transactions spans different time zones and payment systems. As a result, counterparties assume various types of risks in the course of settlement. As suggested by the Sodhani Committee, RBI took the initiative to establish CCIL in 2001 to mitigate risks in the Indian financial markets. As India’s first centralised clearing and settlement system for the financial sector, CCIL’s role in facilitating settlement of both debt and forex transactions is perhaps unique.

(ii) CCIL undertakes settlement of forex trades on a multilateral net basis through a process of novation and all trades accepted are guaranteed for settlement. On an average, CCIL daily settles over 3500 deals covering an average gross volume of around US$3.5 billion, representing over 80% of the market. CCIL has been able to offer netting advantage consistently. In addition to benefits of risk mitigation, CCIL’s intermediation also provides to its members other tangible benefits such as improved efficiency, lower operational cost and easier reconciliation of accounts with correspondents. CCIL has improved operational efficiency with a zero failure rate. We will be happy to share our experience with our Asian friends.

(iii) Since it started its operations, CCIL has consistently endeavoured to add value to the services, and has gradually brought the entire gamut of forex transactions under its purview. It has also, over time, added more and more functionalities enhancing the value of its product. Similarly, CCIL has also launched a Forex Trading Platform to facilitate US Dollar /Rupee deals by banks in India. This platform has been given to members free of cost. The platform offers both Order Matching and Negotiation modes for dealing. The USP of the platform is its offer of Straight-Through Processing capabilities as it is linked to CCIL’s settlement platform. RBI encourages the authorised dealers to take full advantage of this and intends monitoring the use of this platform to make it more user friendly and widely used.

(iv) In India, the Foreign Exchange Dealers Association of India as a self-regulatory organisation formed by authorised dealers plays a constructive role in market development by initiating debates on important issues, organising training programmes and providing technical expertise on various matters. We expect the FEDAI to enhance its catalytic role in market development in the years ahead.

(v) To further the participatory process in a more holistic manner by taking into account all segments of the financial markets, the ambit of the Technical Advisory Committee (TAC) on Money and Securities Markets set up by RBI in 1999 has been expanded in 2004 to include forex markets and the Committee has been renamed as TAC on Money, Securities and Forex Markets.

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