RBI Allows Foreign Currency Accounts in GIFT City

  • July 13, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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RBI Allows Foreign Currency Accounts in GIFT City

Sub: Economy

Sec:  External Sector

The Reserve Bank of India (RBI) has allowed Indian citizens to open foreign currency accounts (FCA) in the International Financial Service Centre (IFSC) at Gujarat International Finance Tech-city (GIFT City) in Gujarat. This decision comes as a significant development for investors, especially given the current restrictions on mutual funds (MFs) investing in overseas equities due to the $8 billion cap.

  • Relief for Investors:
    • The RBI’s move is a major relief as mutual funds’ investments in overseas equities have been frozen after reaching the $8 billion cap.
    • This includes a $1 billion limit specifically for overseas exchange-traded funds (ETFs).
  • Enhanced Investment Opportunities:
    • The new regulation allows Indian residents to open FCAs in GIFT City, enabling them to manage up to $250,000 annually for international transactions without prior RBI approval.
    • This facilitates broader global investment opportunities, allowing individuals to diversify their portfolios with stocks, bonds, and other foreign assets.
  • Global Financial Participation:
    • By opening FCAs in GIFT City, individuals can keep their funds within the Indian financial system while participating in global financial activities.
    • This is particularly beneficial for high net worth individuals who typically open accounts in international financial hubs like Dubai and Singapore.
  • Progressive Financial Reforms:
    • This measure is seen as a progressive step towards achieving full convertibility of the Indian rupee and establishing it as a global currency.
    • It aligns GIFT City with other international financial centres, enhancing its global competitiveness.

Conclusion

The RBI’s decision to allow foreign currency accounts in GIFT City is a significant step towards liberalizing India’s financial sector. It opens up new avenues for Indian investors, promoting financial inclusion and facilitating broader global investment opportunities. This move not only provides relief amidst the restrictions on mutual funds’ overseas investments but also positions GIFT City as a competitive international financial hub.

Current Account Convertibility

India achieved full current account convertibility in August 1994. This means that all transactions related to trade in goods and services, interest payments, and remittances can be freely conducted without restrictions.

  • Trade in Goods and Services:
    • Importers and exporters can convert their earnings and payments between the Indian rupee and foreign currencies without restriction.
    • This facilitates international trade and investment.
  • Interest Payments and Remittances:
    • Individuals and businesses can freely remit interest payments and receive remittances from abroad.
    • Non-resident Indians (NRIs) can send money back to India without any limits.

Capital Account Convertibility

India has partial capital account convertibility. This means that there are certain restrictions on the conversion of the rupee into foreign currencies for capital transactions.

  • Foreign Direct Investment (FDI):
    • FDI is largely liberalized, and foreign investors can invest in most sectors without prior government approval.
    • There are some sectors with caps on foreign ownership and areas where government approval is required.
  • Foreign Portfolio Investment (FPI):
    • Foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) can invest in Indian securities such as stocks and bonds.
    • There are certain limits on the amount of investment in specific sectors and types of securities.
  • External Commercial Borrowings (ECBs):
    • Indian companies can raise debt from foreign lenders, but there are regulations governing the amount, maturity, and cost of these borrowings.
  • Outbound Investments:
    • Indian companies can invest abroad, but these investments are subject to limits and regulatory approvals.
    • Individuals can also invest abroad under the Liberalized Remittance Scheme (LRS), which allows them to remit up to USD 250,000 per financial year for various purposes, including investments.
economy RBI Allows Foreign Currency Accounts in GIFT City