The last year has seen a gradual easing of exchange controls for individuals. India is still a long way from individuals buying dollars for rupees. But it is now possible to start diversifying into cross-border assets.

The first stage was the deregulation that allowed NRIs to repatriate proceeds from real estate. This could eventually lead to fresh funds flowing into real estate. It may encourage NRIs to invest in Indian property.  Foreigners can't hold Indian real estate and the children of most NRIs are foreigners. So NRIs are worried about repatriation of inheritance. Those concerns are being addressed.

The next step: residents can now buy real estate abroad. This is restricted to corporate deals, in theory. However in practice, an interested individual can establish a company that does some nominal import/ export and buy property abroad.

Individuals can also invest in listed companies abroad as well as in government securities. Gilts could eventually be a useful hedge. Right now, it doesn't make economic sense to move into foreign bond markets. Euro, yen and dollar yields are way below the  rupee T-bill returns. However importers and exporters can earn higher returns from currency assets held abroad.

The universe of investible companies is currently restricted by an apparently senseless proviso that insists the parent MNC must have a listed Indian subsidiary. This cuts out the Cokes, Pepsis, Oracles, Suns, IBMs and Microsofts -- all of these have 100 per cent subsidiaries in India.

Also, given the breakneck pace of delisting by MNCs who are offering en masse buybacks in Indian subsidiaries, this doesn't seem much of an opportunity in practice. There will also be interesting legal situations if an Indian invests in an MNC parent, which subsequently delists its Indian subsidiary. There may be a further easing in controls during fiscal 2003-04 with the entire gamut of listed MNCs being made available for investment.

The overt reason for these measures is simply that Indian reserves have hit the $70 billion stage. This hurts because of the differentials in domestic and foreign interest rates -- the RBI loses money holding those assets abroad. Releasing those reserves into the domestic markets would mean surging liquidity. So why not let Indians invest abroad?

An unspoken reason is that an easing of controls may lead to hawala money flowing back. This is probably already happening. And, given guarantees of easy repatriation, the flow of hawala funds back into the rupee will increase. Eventually if easy two-way conversion is offered, hawala will dwindle and die -- just as gold smuggling did after legal import was allowed.

The 1993 Budget promised all this and more in the way of capital account convertibility. What are the next steps in this long process? There is an increasing need for Indians to hedge forex movements. The very easing of controls leads to greater sensitivity to the external environment.

Ideally domestic players could be allowed to take forward contracts. Offering futures and options in dollar-denominated indices like the Dow Jones and the Footsie also seems feasible. These instruments could be rupee-denominated and no more dangerous than any other margined derivative like a Nifty contract.

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