Capital controls
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Capital controls are government rules that limit money moving into or out of a country for investment or borrowing. They can be limits, taxes or approval requirements on cross-border flows. They protect the economy from sudden, large swings of foreign money, which can crash the currency. India does not allow fully free capital movement, so it uses calibrated controls: it opens up step by step and keeps some limits. The IMF's "institutional view" (2012) now accepts such capital-flow management measures in some conditions.
Example
India caps how much Indian companies can borrow abroad through external commercial borrowings (ECB) and how much foreign portfolio investors (FPIs) can put into Indian debt. In 2020, the Fully Accessible Route (FAR) removed the limits for non-residents on certain government securities (G-secs) only.
Don't confuse with
- Capital account convertibility: this is the freedom to convert domestic assets into foreign assets and back. Capital controls are the limits placed on that freedom. The more controls a country has, the less convertible its capital account is.
Related concepts
- Currency convertibility
- Current account convertibility
- Capital account convertibility
- Liberalised Remittance Scheme