India has safeguards in place to mitigate risks from capital flows: IMF

“There are quite a few safeguards that the Indian economy has in terms of capital flows”

India, which has received a record number of foreign direct investment during the last few years despite COVID-19 crisis, has quite a few safeguards in place to mitigate the risks from capital flows, the International Monetary Fund said Wednesday.

“Capital flows have several benefits. They finance needed investments. They help insure against some kinds of risks. There are many benefits to countries from having capital flows in India and also benefits from receiving those capital flows,” IMF’s First Deputy Managing Director, Gita Gopinath, told reporters here.

The IMF on Wednesday released a paper on the Review of the Institutional View (IV) on the Liberalization and Management of Capital Flows. The IV was adopted in 2012 and provides the basis for consistent Fund advice on policies related to capital flows.

The IV aims to help countries reap the benefits of capital flows while managing the associated risks in a way that preserves macroeconomic and financial stability and does not generate significant negative outward spillovers. The Review introduces important changes that expand the toolkit for policymakers, such as allowing the pre-emptive use of capital flow measures on inflows if financial vulnerabilities exist.

In response to a question, Ms. Gopinath noted that there are other kinds of financial risks associated with having large amounts of capital inflows.

“In the case of India, there are a large number of capital restrictions already in place. The Indian government uses these restrictions quite proactively in dealing when the external environment changes. So, by putting restrictions on the amount of external borrowing the corporates can do, that is an instrument that they use. And they use it in response to changing external circumstances.”

“So, there are quite a few safeguards that the Indian economy has in terms of capital flows. But of course, it is still in the process of liberalizing its capital accounts. And as its financial markets deepen, it’s financial institutions deepen, it could move towards more, allowing for more forms of capital flows,” Ms. Gopinath said.