The National Common Minimum Program (NCMP) of the UPA government had promised to encourage foreign equity flows into India, while "checking speculation". In order to translate this wish into policies, the Ashok Lahiri committee was setup in the Department of Economic Affairs [link to pdf]. The most fascinating thing about the report is actually a dissent note by RBI (page 59), which spells out the capital controls that RBI wants. In summary:
- They think the "origin and source" of investment funds matters greatly.
- They want a committee to study measures to curb volatility of portfolio flows.
- They want to continue to have restrictions through the separate enforcement of FDI and FII limits.
- They want to ban participatory notes.
- They want to remove any hedge funds which are FIIs today, and block future registration of hedge funds.
- If entity X is eligible to come into India as a subaccount, but not as an FII, and is not presently in India, they want to block it.
- They want to continue with the existing ceiling on the stock of FII ownership of debt securities, rather than shifting to a ceiling on the flow of debt investments per year.
Today's Business Standard has an excellent edit which disagrees with RBI's position on the direction of the evolution of India's capital controls. The edit says: Rather than keeping certain types of investors out, the policy objective with respect to foreign investment should be to keep most, if not all, in. That means making it easier for foreign investors to buy stocks in India, to the point where they should not have to come in through the conduit of registered FIIs.Update: Andy Mukherjee has an excellent column titled Hedge Funds Bring Capital, Anxiety to India on Bloomberg, where he links up the issues of capital controls and the impossible trinity.