At the Annual Asia Securities Industry & Financial Markets Association (ASIFMA) conference in Singapore, Deputy Governor of the Reserve Bank of India Shri R. Gandhi explained why India would be better off increasing competition in the banking sector. The opening of branches in un-banked and under-banked centers, he said, would increase the flow of credit necessary for equitable development, diversify risks and help to tap latent opportunities. “On the one hand channelizing foreign investments; on the other hand boost competitive spirit amongst the financial sector entities, thereby, raising the efficiency bar of the domestic players,” he continued. (Gandhi, 2014)
These statements are a powerful reminder of the transformational role foreign banks play in influencing the host country economies. However, let us also consider the implication of policy preferences of various socioeconomic groups toward further financial integration.
First, foreign banks account for less than one per cent of total branches of commercial banks in India. Out of the total of 318 foreign bank branches, 315 are in urban and metropolitan areas (RBI, 2014).
Second, over the long run, international financial integration has historically favored capital over labor (Rogowski, 1987; Frieden, 1991). In the shorter run and in terms of politics and policies, financial integration favors capitalists with mobile or diversified assets, and disfavors those with assets tied to specific locations and activities such as manufacturing or farming (Frieden, 1991).
Third, its true an important explanation for the current stability and growth of India’s financial sector has been the role of the Reserve Bank and the Ministry of Finance (along with other institutions like the Securities and Exchange Board of India (SEBI) that were set up by them in the 1990s), (Kapur, 2010). However, international capital mobility changes the pattern of lobbying over national policies in developing country economies. More specifically, it tends to shift the debate toward the exchange rate as an intermediate or ultimate policy instrument, thereby driving a wedge between those more sensitive and those less sensitive to exchange rate fluctuations and between those who favor currency appreciation and those who favor depreciation (Frieden, 1991). This tracks a division of the economy between producers of tradable goods on the one hand, and international investors of producers of non-tradable goods and services on the others.