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Capital Flows and their Macroeconomic Effects in India

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  • Renu Kohli

Abstract

This paper documents trends in movement and composition of capital flows into India in a comparative perspective, examines the impact of these flows upon key macroeconomic variables in the economy, and dwells on implications for economic policy. We find that an inflow of foreign capital results in a real appreciation and has a significant impact on domestic money supply. During a capital surge, these effects have been countered through intervention and sterilization. The paper concludes with a discussion on the costs of these policies in the event of a heavy inflow of foreign capital into India.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/192.

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Length: 36
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/192

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Keywords: Capital flows; Foreign exchange reserves; Intervention; capital inflows; exchange rate; foreign capital; real exchange rate; foreign exchange; exchange reserves; net capital; real effective exchange rate; capital controls; private capital flows; capital mobility; exchange rates; capital inflow; exchange rate regime; exchange rate appreciation; capital outflows; stock market; real exchange rate appreciation; foreign capital inflows; private capital; domestic credit; current account deficit; real exchange rates; effective exchange rate; international capital; real appreciation; government securities; capital account liberalization; current account balance; real effective exchange rates; international capital flows; exchange rate policy; capital markets; short-term capital; flexible exchange rate; exchange rate movements; stable exchange rate; effective exchange rates; fixed exchange rate; foreign investment; determinants of capital flows; short-term capital inflows; flexible exchange rate policy; capital market; nominal exchange rate; exchange rate management; net] capital flows; stable exchange rate regime; exchange rate changes; composition of capital inflows; exchange rate flexibility; foreign capital inflow; global capital markets; investor confidence; government bonds; bond issues; domestic bonds; exchange risk; liberalization of capital; real exchange rate series; speculative capital; exchange rate policies; floating exchange rate; exchange rate fluctuations; securities ? transactions; capital account restrictions; exchange rate behavior; equity participation; official flows; commercial bank lending; private foreign capital; speculative attack; capital account liberalisation; floating exchange rates; equity capital; moral hazard; inflation rate; exchange rate targeting; fixed exchange rate regime; domestic borrowing; net] capital; real exchange rate behavior; private flows; flexible exchange rate regime; foreign exchange market;

References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Corbo, Vittorio & Hernandez, Leonardo, 1994. "Macroeconomic adjustment to capital inflows : Latin American style versus East Asian style," Policy Research Working Paper Series 1377, The World Bank.
  2. Takatoshi Ito, 2000. "Capital Flows in Asia," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-296 National Bureau of Economic Research, Inc.
  3. Henning Bohn & Linda L. Tesar, 1996. "U.S. portfolio investment in Asian capital markets," Proceedings, Federal Reserve Bank of San Francisco, pages 43-72.
  4. Takatoshi Ito & Anne O. Krueger, 1994. "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3," NBER Books, National Bureau of Economic Research, Inc, number ito_94-1, June.
  5. Linda S. Goldberg & Michael W. Klein, 1997. "Foreign Direct Investment, Trade and Real Exchange Rate Linkages in Developing Countries," NBER Working Papers 6344, National Bureau of Economic Research, Inc.
  6. Hernandez, Leonardo & Rudolph, Heinz, 1995. "Sustainability of private capital flows to developing countries : Is a generalized reversal likely?," Policy Research Working Paper Series 1518, The World Bank.
  7. Claessens, Stijn & Dooley, Michael P & Warner, Andrew, 1995. "Portfolio Capital Flows: Hot or Cold?," World Bank Economic Review, World Bank Group, vol. 9(1), pages 153-74, January.
  8. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, vol. 63(1), pages 59-83, October.
  9. Reinhart, Carmen & Khan, Mohsin, 1995. "Capital Flows in the APEC Region," MPRA Paper 8200, University Library of Munich, Germany.
  10. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries," IMF Working Papers 01/103, International Monetary Fund.
  11. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  12. Linda M. Koenig, 1996. "Capital Inflows and Policy Responses in the AsEAN Region," IMF Working Papers 96/25, International Monetary Fund.
  13. Sebastian Edwards & Francisco Gil Diaz & Arminio Fraga, 1999. "Capital Flows to Latin America," NBER Chapters, in: International Capital Flows, pages 5-56 National Bureau of Economic Research, Inc.
  14. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
  15. Reuven Glick, 1994. "Exchange rate arrangements in the Pacific Basin," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep16.
  16. Kenneth Kletzer & Mark Spiegel, 1996. "Speculative capital inflows and exchange rate targeting in the Pacific Basin," Pacific Basin Working Paper Series 96-05, Federal Reserve Bank of San Francisco.
  17. Renu Kohli, 2004. "Aspects of Exchange Rate Behaviour and Management in India 1993- 98," International Finance 0405010, EconWPA.
  18. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
  19. Kohli, Renu, 2003. "Real exchange rate stabilisation and managed floating: exchange rate policy in India, 1993-2001," Journal of Asian Economics, Elsevier, vol. 14(3), pages 369-387, June.
  20. Takatoshi Ito & Kathryn M. Dominguez & Moeen Qureshi & Zhang Shengman & Masaru Yoshitomi, 1999. "Capital Flows to East Asia," NBER Chapters, in: International Capital Flows, pages 111-190 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Kohli, Renu, 2004. "The Transition from Official Aid: to Private Capital Flows Implications for a Developing Country," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries," IMF Working Papers 01/103, International Monetary Fund.
  3. Vardhan, Harsh & Sinha, Pankaj, 2014. "Influence of Foreign Institutional Investments (FIIs) on the Indian stock market," MPRA Paper 53611, University Library of Munich, Germany.
  4. Masood, Tariq & Ahmad, Mohd. Izhar, 2009. "Macroeconomic Implications of Capital Inflows in India," MPRA Paper 19299, University Library of Munich, Germany, revised 06 Oct 2009.

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