Capital Controls (India) — FEMA Framework
India maintains a partially open capital account under the Foreign Exchange Management Act 1999 (FEMA), with current account transactions freely permitted but capital account transactions subject to specific rules, schedules, and limits administered by the RBI and the Government of India.
India's capital account framework is governed primarily by the Foreign Exchange Management Act 1999 (FEMA), which replaced the Foreign Exchange Regulation Act 1973 (FERA). The philosophical shift was significant: FERA treated all foreign exchange transactions as presumptively prohibited unless specifically permitted, while FEMA treats current account transactions as permissible and subjects only capital account transactions to specific regulation.
Capital account convertibility in India is partial. The Tarapore Committee reports of 1997 and 2006 laid out roadmaps for fuller convertibility, but India has deliberately chosen a gradual and sequenced approach, maintaining controls that provide a buffer against sudden capital flow reversals of the type that destabilised several Asian economies in 1997–98 and several emerging markets in 2013 (the taper tantrum).
Specific capital account rules include: Foreign Direct Investment (FDI) is permitted up to specified sector-wise ceilings under the automatic route or with government approval; Foreign Portfolio Investment (FPI) is permitted with aggregate limits in equity and debt; Overseas Direct Investment (ODI) by Indian companies is subject to thresholds relative to net worth; External Commercial Borrowing (ECB) is permitted within RBI-prescribed all-in-cost ceilings; and the Liberalised Remittance Scheme (LRS) allows resident individuals to remit up to $250,000 per financial year for permissible current and capital account purposes.
Capital controls create a wedge between onshore and offshore interest rates and between the onshore rupee (INR) and offshore Non-Deliverable Forward (NDF) markets where non-resident entities take positions on the rupee without access to the onshore market. When capital flow pressures build, the NDF market often diverges from the onshore market, providing a signal of directional pressure that the RBI monitors.
For cross-border investors, FEMA compliance — through registration as FPI with SEBI, adherence to investment limits, reporting requirements, and know-your-customer obligations — is a prerequisite for market access. Violations of FEMA are civil offences (unlike FERA violations, which were criminal), with adjudicating authority vested in the Enforcement Directorate under the Ministry of Finance.