The nervousness is back, and so are direct physical controls. In an otherwise staid monetary policy document released on February 5, 2015, Reserve Bank of India Governor Raghuram Rajan has inserted one small restriction: henceforth all foreign portfolio investors investing in debt instruments — issued by government or private sector companies — have to hold on to their investments for a minimum of three years. This is a discreet admission of the risks confronting the Indian economy, as well as a hint of the central bank’s anxieties.
But imposing administrative controls in this day and age — even if they are meant to mitigate risks — sends wrong signals, especially when alternative fiscal instruments are available to achieve the same results. Even the European Union has agreed to implement such a measure in the face of stiff opposition from Britain and Sweden.