India’s exchange control regime is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA). This legislation regulates foreign exchange transactions with the objective of facilitating external trade and payments while promoting the orderly development and maintenance of the foreign exchange market in India. The Reserve Bank of India (RBI), in consultation with the Government of India, is the apex authority responsible for administering FEMA and formulating related policies.
Key Features of India’s Exchange Control Framework
1. Objective of FEMA
FEMA was enacted to consolidate and amend the law relating to foreign exchange, with the overarching aim of promoting international trade and payments, and ensuring the orderly development of the foreign exchange market in India.
2. Role of the RBI
The Reserve Bank of India is entrusted with the administration of FEMA. It issues regulations, circulars, and directions to implement the provisions of the Act and to frame operational policies for exchange control in the country.
3. Classification of Transactions
FEMA makes a clear distinction between:
- Current Account Transactions: These involve payments related to trade, services, and short-term banking and credit facilities, and do not result in a change in assets or liabilities outside India.
- Capital Account Transactions: These involve changes in the assets or liabilities, including contingent liabilities, outside India of persons resident in India or in India of persons resident outside India.
4. Rupee Convertibility
The Indian rupee is fully convertible on the current account, allowing residents and non-residents to freely undertake current account transactions. On the capital account, convertibility is more regulated, although non-residents enjoy substantial freedom in certain types of capital account transactions.
5. Progressive Liberalization
India has gradually liberalized its foreign exchange control norms, particularly in the context of foreign direct investment (FDI). Repatriation of profits, dividends, interest, and proceeds from disinvestment is generally permitted, subject to prescribed conditions.
6. Market Intervention
The RBI closely monitors developments in the foreign exchange market. To manage volatility and maintain orderly conditions, the RBI may intervene through the purchase or sale of foreign currency.
7. Compliance and Enforcement
All persons resident in India, as well as non-residents engaging in transactions governed by FEMA, must comply with its provisions and related regulations, rules, and notifications issued by the RBI. Non-compliance may attract penal consequences under the Act.
8. Sector-Specific Regulations
FEMA and its subordinate legislation also provide specific regulatory frameworks for:
- Import and export of foreign currency and goods
- Capital account transactions by residents and non-residents
- Acquisition and transfer of immovable property by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs)
- Borrowings and lending between residents and non-residents
Conclusion
India’s exchange control framework under FEMA is designed to support macroeconomic stability while encouraging international trade and investment. It strikes a balance between maintaining a stable foreign exchange environment and facilitating liberalized cross-border economic activities in a regulated manner.
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