##scher, marcel : capital controls and foreign exchange policy, working paper series, european central bank, february 2012. kit. which of these is used is basically a function of the degree of development of the economy and markets of the country. capital flow management in india 11. external sector liberalisation started in india with the economic liberalisation process that commenced in the early nineties – moving to a a floating exchange rate regime and freeing up current account transactions. the enactment of the foreign exchange management act, 1999 codified this arrangement with relatively free current account transactions ( except for a negative list ) and controlled capital account transactions. liberalisation in this context basically meant gradually freeing up capital account transactions. over the last two decades, fdi has become more or less unrestricted except ( i ) for some sectoral caps and ( ii ) restrictions in a few socially sensitive ( e. g., gambling ) or volatile ( e. g., real estate ) or strategic ( e. g., atomic energy ) sectors. 12. the policy regime for foreign portfolio investments in india commenced in 1992 when foreign institutional investors ( fiis, or, since january 2014, fpis ) were allowed to invest in domestic financial instruments, basically equity. fpis were given access to corporate debt markets in 1995 and to g - secs in 1997. thus, the fpi regime has followed the standard process of liberalising equity flows first and then gradually freeing up debt capital. apart from sectoral caps to regulate control, portfolio flows into equities in india are virtually unrestricted. access to debt markets - sovereign and corporate - is subject to macro caps and other macroprudential limits. these are designed to safeguard the domestic economy from excessively speculative hot money flows. 13. there is an effort to liberalize fpi debt flows further with the introduction of the fully accessible route ( far ) which places no limit on non - resident investment in specified benchmark securities. since over time, virtually all securities will fall under the far category, the move is unambiguously towards an eventual unfettered access for non - residents into government securities. efforts to get india included under global bond indexes and the complementary move towards placing g - secs under global custodians, once implemented, will encourage debt flows in future. 14. the first comprehensive guidelines on external commercial borrowing ( ecb ) were issued by government, in july 1999. it has been liberalised over time. currently, ecb

and enhance global liquidity ( oecd, 2017 ) 2. what are the risks of free capital mobility and how are these risks managed? 5. the various currency and banking crises experienced over the last few decades have simultaneously highlighted the costs and risks of internationalization such as exposure to global shocks, credit and asset bubbles, exchange rate volatility oecd ( 2017 ), open and orderly capital movements : interventions from the 2016 oecd high - level seminar. associated with sudden exit of capital and higher refinancing risk. increased globalization has brought to the fore the vulnerability to contagion effects. while it was argued that such risks are the short - term pains needed to reap long term gains ( kaminsky and others, 2008 ) 3, there is now a wider acceptance that benefits of internationalization are not an unmixed blessing and that there is a nuanced trade off between growth and crisis risk. such awareness has led to policy focus on three fronts. a. first, that benefits of internationalization presupposes sound macroeconomic fundamentals, a well developed financial system and a sound market infrastructure, including efficient markets for funding and risk transfer. b. second, that countries need to develop appropriate tools to deal with the risks of internationalization, in particular, tools to manage the volume and composition of capital inflows and macro prudential tools. c. and third, that different types of capital flows carry different risks – some are riskier than others. the agreed hierarchy of capital flows is that foreign direct investment is the least risky, followed by equity investment, followed by debt capital. while fdi is seen to contribute to long - run growth, portfolio equity gives a shorter run boost. debt flows, while necessary, are susceptible to be volatile. understandably, the focus of capital flow regulations, and macro - prudential regulations, has been debt flows. kaminsky graciela laura and sergio l. schmukler : short - run pain, long - run gain : financial liberalization and stock market cycles, review of finance, 2008 6. capital flow measures are effective insofar as they lead to safer external liability structures, by reducing dependence on foreign borrowing and could be particularly effective during sudden - stop episodes. they work essentially by avoiding risky flows or containing short - term debt or controlling currency exposure of domestic borrowers. especially for economies where capital flows are relatively large, or the exposure of banking systems is significant, these measures