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Managing capital flows: The case of India

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  • Shah, Ajay

    ()
    (National Institute of Public Finance and Policy)

  • Patnaik, Ila

    ()
    (National Institute of Public Finance and Policy)

Abstract

From the early 1990s, India embarked on easing capital controls. Liberalization emphasised openness towards equity flows, both FDI and portfolio flows. In particular, there are few barriers in the face of portfolio equity flows. In recent years, a massive increase in the value of foreign ownership of Indian equities has come about, largely reflecting improvements in the size, liquidity and corporate governance of Indian firms. While the system of capital controls appears formidable, the de facto openness on the ground is greater than is apparent, particularly because of the substantial enlargement of the current account. These changes to capital account openness were not accompanied by commensurate monetary policy reform. The monetary policy regime has consisted essentially of a pegged exchange rate to the US dollar throughout. Increasing openness on the capital account, coupled with exchange rate pegging, has led to a substantial loss of monetary policy autonomy. The logical way forward now consists of bringing the de jure capital controls uptodate with the de facto convertibility, and embarking on reforms of the monetary policy framework so as to shift the focus of monetary policy away from the exchange rate to domestic inflation.

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Bibliographic Info

Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 08/52.

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Length: 33
Date of creation: May 2008
Date of revision:
Handle: RePEc:npf:wpaper:08/52

Note: Working Paper 52, 2008
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Web page: http://www.nipfp.org.in

Related research

Keywords: International investment ; Long term capital movements ; International lending and debt problems ; Monetary systems;

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  1. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
  2. Claessens, Stijn & Schmukler, Sergio L., 2007. "International financial integration through equity markets: Which firms from which countries go global?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 788-813, September.
  3. repec:nbr:nberwo:11387 is not listed on IDEAS
  4. Manmohan Singh, 2007. "Use of Participatory Notes in Indian Equity Markets and Recent Regulatory Changes," IMF Working Papers 07/291, International Monetary Fund.
  5. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  6. Poonam Gupta & James P. F. Gordon, 2004. "Nonresident Deposits in India," IMF Working Papers 04/48, International Monetary Fund.
  7. Shah, Ajay, 2008. "New issues in Indian macro policy," Working Papers 08/51, National Institute of Public Finance and Policy.
  8. Ajay Shah & Ila Patnaik, 2007. "India’s Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
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Cited by:
  1. Eswar S. Prasad, 2009. "Some New Perspectives on India's Approach to Capital Account Liberalization," NBER Working Papers 14658, National Bureau of Economic Research, Inc.
  2. Kodongo, Odongo & Ojah, Kalu, 2013. "Real exchange rates, trade balance and capital flows in Africa," Journal of Economics and Business, Elsevier, vol. 66(C), pages 22-46.
  3. Eswar S. Prasad, 2009. "India’s Approach to Capital Account Liberalization," Working Papers id:2043, eSocialSciences.

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