Question

What do you mean by Capital Account Regulations? Why are emerging economies considering to have them? What would be your advice to these countries?

Answer 1

Capital account regulations deal with the foreign exchange management and transaction of assets under the capital account of the BOP of the country. Here, the capital account regulations help not only to prevent the illegal transaction or movement of forex into and from the country, but also, it brings stability to the economy. With the help of capital account regulations, the volatility associated with the capital market is also controlled.
Capital account regulations are important for the emerging economies as these economies are facing a boom in their economy and with that boom, there is a huge influx of forex and foreign ownership of domestic assets. It seems good that the economy grows with these developments, but it also adds volatility as forex and assets ownership can move out of the country very quickly and the market can crash. To prevent such an economic disaster, there is a need for capital account regulations that can inhibit the quick withdrawals and FIIs moving out of the country. Hence, measures like capital account regulations are strictly required by the emerging economies to maintain stability with the growth.
My advice will be to go with measures like partial capital account convertibility to the foreign institutional investors. It will make the economy to remain attractive as well as domestic interests will also be safeguarded. Such measures are effectively implemented by countries like India. A regulated economic growth is very important to achieve the long term objectives of economic development and it is only possible when capital account regulations are in place.