allowed, in case of capital account transactions the principle is that only anything that is not allowed is forbidden. this makes a great demand on the framers of regulations, lest the investment and business is subject to the limitations of their perceptions. the way business is done is forever evolving and it is a difficult job for the regulators to keep pace with it. there is a very good case for relooking at this principle and align the regulatory approaches for current and capital account transactions. even as we liberalise capital account more and more, the universe of restrictions shrinks and the regulatory structure will be simpler if it mentions what is prohibited rather than what is allowed. 24. as we move to more liberalisation and rationalization of regulations, there have been some unsettling developments in the recent past. advance remittance for imports without any corresponding imports into india, receipt of advances for exports without exports bis central bankers ’ speeches materialising for a long time and more recently the revelations of the so called “ panama papers ”. in case of panama papers, on the basis of reports, it is suspected that some indian individuals may have been involved in setting up of businesses maintaining balances abroad illegally. investigations are on and the situation can be assessed only on conclusion of the process when full details are available. the question that troubles us is should the unfolding of these events influence our approach to regulating cross - border transactions? 25. on this subject i cannot help recalling what the finance minister yashwant sinha said in the lok sabha on november 19, 1999 while replying to a debate on the foreign exchange management bill. i quote “ what we are trying to do through this legislation is to bring the entire management of foreign exchange in line with the changes which have taken place as a result of liberalization on current account. i strongly refute with all the emphasis at my command that this piece of legislation is going to help the blackmarketeers, the black money operators or the hawala operators. this is a figment of the imagination of a section of the members of this house and i refute it as i said with all the emphasis at my command. this is in terms of meeting a new situation which has come about as a result of liberalization of the foreign exchange management and the act will only facilitate that management. that is the reason why we are introducing this legislation. we have already introduced the prevention of money laundering bill. the two legislations, i will suggest, should be considered

special importance for india like unemployment for americans and inflation for germans. the memory of the 60 ’ s and 70 ’ s when the critical shortage of foreign exchange reserves forced us to resort to the pl 480 for meeting the food requirement of the country are pretty strong. exchange rate movement either way can affect us adversely. appreciation could hurt our exports and depreciation would make the imports expensive. given that our large part of imports comprises crude, fertilizer, capital goods and intermediates, increase in the cost of imports due to depreciation of currency can hurt our growth and employment and affect the fiscal balance. 11. in this backdrop, there are two questions that need to be posed. first, how to ensure that the exchange rate remains stable and, as is stated in the preamble to fema, 1999, how to preserve orderliness in the foreign exchange market? second, the exchange rate will be stable and not fixed, and therefore, there will be some volatility in the foreign exchange market. therefore, how to enable those affected by the exchange rate to cope with the risk inherent in a volatile market? 12. i will deal with the second problem first. as long as the inflation differential between india and the other countries remain positive, the indian currency will exhibit depreciation over the long term. however, in a world dominated by capital flows, there can be significant deviations from the long - term path indicated by the real effective exchange rate ( reer ). reer itself, one should note, is a function of several dynamic factors and variables and hence, may not serve as very accurate anchor as the base period loses its relevance in the face of more recent developments. even in the case of us dollar, the deviation from the long term represented by the reer is known to have been of the order of 80 per cent. such volatility affects the earnings and balance sheet of all firms that have contracted or even economic exposures. the approach to resolve this problem is to provide a deep and liquid foreign exchange derivatives market to enable market participants to hedge their foreign exchange risk. i have spoken about the derivatives market in detail elsewhere and do not wish to deal with it in detail here. 1 the most straightforward derivatives are the forward contracts or their exchange traded counterpart, the currency futures where the payoffs are simple and linear. while the pricing of these derivatives are fairly simple based on the interest rate differentials, the use of these products by the market participants is