the key arguments favouring a more open capital account has been the attendant benefits it brings to the development of domestic markets. it was believed that free capital flows into the financial markets are necessary for efficient allocation of resources and for completion of markets by providing more liquidity. the potency of this argument has at least partly been dented by the crisis which has demonstrated that pursuit of development of financial markets per se cannot be an end in itself. however, trying to balance all objectives does bring its own challenges for policymaking. it has been argued that in today ’ s financial world of complex derivatives, it is really not possible to have restrictive policies for flow of capital. the significant increase in the ndf volumes involving inr is a case in point. the recent bis triennial survey was pretty revealing in this regard. from a regulatory perspective, the real issue is the impact of this market on the onshore markets. our preliminary estimates have not been able to establish a causal relationship between the ndf and onshore markets but going by the experience of other countries, the ndf market can indeed be a source of vulnerability. it does raise certain issues particularly regarding the nature of operations of banks as well as corporates having cross - border presence which may need to be looked into. recently, there were reports that korea has a similar audit of some overseas banks over trading in currency derivatives which are suspected of being “ speculative moves ”. it is often suggested that the way to deal with the ndf market is to bring it onshore. in other words allow non - deliverable forwards in the indian market with free access to all non - residents which have the same impact as full capital account convertibility. bis central bankers ’ speeches another related issue is that of use of rupee for trade invoicing. it is argued that rupee invoicing may be a preferred option to help domestic exporters and importers to deal with currency volatility. even now, there are no regulatory restrictions coming in its way. the issues are twofold : first, the acceptability of rupee invoicing to the overseas trade counterparty ; and two, the attractiveness of rupee for credit facilities. acceptability may be increased by devising a mechanism to permit the overseas party to hedge its rupee exposures onshore. the rbi is willing to examine this and i would urge fedai to come up with feasible suggestions in this regard. the guidelines on cds will be released shortly. one of the

shyamala gopinath : approach to capital account management – shifting contours keynote address by ms shyamala gopinath, deputy governor of the reserve bank of india, at the annual conference of the foreign exchange dealers ’ association of india ( fedai ), thimpu, 18 february 2011. * * * thank you for inviting me to this forum once again and that too in these sublime environs. only in such sublimity could the deeply spiritual concept of “ gross national happiness ” have been crystallised into a national policy mission. the theory of gross national happiness ( gnh ) established by his majesty the king of bhutan in 1972, defines bhutan ’ s development objective as improvement in the happiness and satisfaction of the people rather than growth of gross national product ( gnp ). included in gnh is a “ middle path ” approach in which spiritual and material pursuits are balanced. i can only hope that after a deep, long standing relationship with bhutan over the last several years, we are able to incorporate at least the spirit of this approach in our economic policies. i have been a inaugural speaker at the fedai conferences during past few years, in person or in absentia and it is always a challenge to select an appropriate topic in line with the overall theme of the conference. i felt really relieved that the theme for this conference attempts to capture a broader canvas, revolving around long - run growth cycles. i hope the deliberations enable us to focus more closely on the relationship between the cart and the horse so that foreign exchange flows do support growth. there are several ways in which capital flows and growth are related. first, growth expectations drive capital flows. in turn, capital flows accelerate growth. if capital flows are well absorbed by the real economy and do not generate macro - economic or financial instabilities, they stay. such capital flows augment growth over the long - run and may help income levels in developing economies converge towards the income levels in advanced economies. second, capital is likely to be attracted towards countries with high productivity growth and higher marginal productivity of capital. however, in practice this is found to be not necessarily true. third, what is generally missed is the fact that it is not just the net capital flows that drive growth, but also the gross capital flows contribute to growth. gross capital flows contribute immensely to diffusion of technology and international knowledge flows. fourth growth augmentation can also take place because capital flows enforce macroeconomic discipline and force firms