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‘Circuit breakers’, whereby foreign investors can invest only in bonds with minimum residual maturity of three years and limitation on the open foreign exchange positions, will dampen the amount of capital flow coming into India, according to Catherine L Mann, Chief Economist, Organisation for Economic Co-operation and Development.
These circuit breakers are a way to reduce the potential vulnerability of the external account, she said.
“This is important because although the foreign private component of debt is relatively low in India, 70 per cent of it is short-term right now. And that creates a lot of vulnerability. So, this idea of lengthening the maturity is something that reduces vulnerability in the external financial account,” Mann said.
Referring to some appreciation in the rupee, she said “If you look at all the emerging markets, India looks like a good place to invest — low interest, more growth, good central bank. So, at the margin, it is a pretty good place.
“But there are some issues about the degree of financial depth here in terms of being able to invest in.”
If India wants the capital to stay and create value, jobs, and increase living standards, it is the business environment that is crucial, Mann said.
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