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Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms

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  • Kenneth M. Kletzer

    (University of California, Santa Cruz)

Abstract

Capital account liberalization in financially repressed economies often leads to a period of rapid capital inflows followed by financial crisis. This paper considers the vulnerability of the Indian economy to financial crises with international financial integration and the policy agenda for further liberalization of capital flows. The legacy of financial repression on fiscal and financial policies poses the primary challenge to stable integration of the domestic financial markets of India with international capital markets. Brief overviews of the theory and experience of liberalization elsewhere and of the recent liberalization by India frame the discussion of the risks of liberalization and sequencing of policy reforms.
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Suggested Citation

  • Kenneth M. Kletzer, 2004. "Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 227-275.
    • Handle: RePEc:bin:indiap:v:1:y:2004:i:2004-1:p:227-275
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    Cited by:

    1. Partha Sen, 2007. "Capital inflows, financial repression, and macroeconomic policy in India since the reforms," Oxford Review of Economic Policy, Oxford University Press, vol. 23(2), pages 292-310, Summer.
    2. Eswar S. Prasad, 2009. "India’s Approach to Capital Account Liberalization," Working Papers id:2043, eSocialSciences.
    3. Steinkamp, Sven & Westermann, Frank, 2018. "Systemic crisis and growth revisited: Has the global financial crisis marked a new era ?," Economics Letters, Elsevier, vol. 170(C), pages 50-54.
    4. Tanveer Ahmad Khan, 2022. "Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period," Foreign Trade Review, , vol. 57(1), pages 41-65, February.
    5. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    6. Prasad, Eswar S., 2009. "Some New Perspectives on India’s Approach to Capital Account Liberalization," India Policy Forum, National Council of Applied Economic Research, vol. 5(1), pages 125-178.
    7. Abhijit Sen Gupta, 2008. "Does capital account openness lower inflation?," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 471-487.
    8. Abhijit Sen Gupta, 2008. "Cost of Holding Excess Reserves - The Indian Experience," Finance Working Papers 22165, East Asian Bureau of Economic Research.
    9. Jinjarak, Yothin, 2013. "Economic integration and government revenue from financial repression," Economic Systems, Elsevier, vol. 37(2), pages 271-283.
    10. Sven Steinkamp & Frank Westermann, 2018. "Systemic Crisis and Growth Revisited: Has the Global Financial Crisis Marked a New Era?," CESifo Working Paper Series 7094, CESifo Group Munich.
    11. Padhan, Rakesh & Prabheesh, K.P., 2020. "Business cycle synchronization: Disentangling direct and indirect effect of financial integration in the Indian context," Economic Modelling, Elsevier, vol. 85(C), pages 272-287.
    12. Prasad, Eswar, 2009. "India's Approach to Capital Account Liberalization," IZA Discussion Papers 3927, Institute of Labor Economics (IZA).
    13. Abhijit Sen Gupta, 2007. "Does Capital Account Openness Lower Inflation?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 191, Indian Council for Research on International Economic Relations, New Delhi, India.

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