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Negotiating the Trilemma: The Indian Experience


  • Sen Gupta Abhijit

    () (Asian Development Bank)

  • Manjhi Ganesh

    () (Jawaharlal Nehru University)


Increased integration with the global capital markets in recent years has forced India to negotiate the trilemma, balancing the objectives of monetary independence, exchange rate stability, and orderly capital flows. India’s calibrated approach towards liberalization of capital account, wherein certain flows and agents were accorded priority in the liberalization process, has helped India to deal with the trilemma.In this paper, we examine India’s experience in negotiating the trilemma during the last three decades. In doing so, we deviate from the existing literature by quantifying the various policy objectives under the trilemma. This allows us to analyze the extent to which pursuit of an objective has entailed giving up two other objectives.Using empirical methods, we find that India has been constrained by the trilemma during the last three decades. However, instead of adopting corner solutions, India has juggled the various policy objectives under the trilemma as per the demands of the macroeconomic situation. The overall policy architecture encompassed active management of capital flows, especially volatile flows and debt flows, a moderately flexible exchange rate regime with the Reserve Bank of India (RBI) intervening at times to prevent excessive volatility, sterilization of these interventions through multiple instruments, and building up of a stockpile of reserves. This intermediate approach has suited India well as it has been able to maintain a healthy growth rate, targeted monetary and credit growth rates, a moderate inflation rate through most of the period, and a sustainable current account deficit.

Suggested Citation

  • Sen Gupta Abhijit & Manjhi Ganesh, 2012. "Negotiating the Trilemma: The Indian Experience," Global Economy Journal, De Gruyter, vol. 12(1), pages 1-21, March.
  • Handle: RePEc:bpj:glecon:v:12:y:2012:i:1:n:5

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    References listed on IDEAS

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    6. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 615-641, June.
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    Cited by:

    1. Sengupta, Rajeswari & Sen Gupta, Abhijit, 2013. "Policy Tradeoffs in an Open Economy and the Role of G-20 in Global Macroeconomic Policy Coordination," MPRA Paper 53948, University Library of Munich, Germany, revised 12 Jul 2013.
    2. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.
    3. Prachi Mishra & Peter J Montiel & Rajeswari Sengupta, 2016. "Monetary Transmission in Developing Countries; Evidence from India," IMF Working Papers 16/167, International Monetary Fund.

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