India is opening its short-term debt market to foreign investors, but liberalisation will be "in a measured way" to avoid causing volatility, central bank governor Raghuram Rajan said today.
Addressing a meeting in Sri Lanka's capital on the sidelines of a South Asian central bank governors' meet, Rajan said India needed to build more liquidity before liberalisation.
"In general, the movement will be towards more liberalisation rather than away from liberalisation," Rajan said. "But we have to do it at our pace."
He said long-term foreign investors wanted a gradual process of opening up of India's debt market but in a way that did not cause "sharp movements when short-term volatile investors leave".
"In the longer run, we believe our markets will be liquid enough that we can absorb that kind of movement (of short-term investors leaving) without significant concerns.
"Once we have enough liquidity in our markets, and of course we see foreign investors as part of that liquidity, we will bring them in in a measured way," he said.
He said India would concentrate on building its reserves to protect the markets from the risk of sudden capital flight.
India encourages foreigners to buy long-term bonds while imposing restrictions on debt that matures in less than three years.
The new government of Prime Minister Narendra Modi unveiled its maiden budget earlier this month, pledging faster economic growth, tighter fiscal discipline and greater openness to foreign investment.
