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Macro-economic management of the Indian economy: capital flows, interest rates, and inflation


  • Arvind Virmani


This paper addresses the issue of surge in capital inflows into a relatively open emerging economy. One of the constraints in dealing with surges is that much of the theoretical analysis is motivated by developed economies with well developed capital and money markets, while emerging economies are characterised by missing market segments and incomplete integration of such markets. It tries to use the existing literature and empirical information on the concerned economy to derive practical policy suggestions for meeting and balancing the objectives of inflation control and sustained growth. One of the noteworthy recommendations is the introduction of an auctioning mechanism for the right to incur foreign debt. This is designed to correct or compensate for the negative externalities arising from such cross-border debt, given the possibility of sharp reversals arising from global external developments and global shocks. The auction of rights to borrow can act as a variable tax that taxes short term flows at a higher rate and adjusts to changing environment. A limited version of such auctions has been tried sucessfully under the supervision of the Securities and Exchange Board of India. The global environment that gave rise to this issue in India has changed dramatically the US financial crisis and global recession. The analysis however, stands and may be useful when the global situation returns to normal and another emerging economy is faced with a similar situation.

Suggested Citation

  • Arvind Virmani, 2009. "Macro-economic management of the Indian economy: capital flows, interest rates, and inflation," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 189-214.
  • Handle: RePEc:taf:macfem:v:2:y:2009:i:2:p:189-214 DOI: 10.1080/17520840902726482

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    References listed on IDEAS

    1. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, EconWPA.
    2. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
    3. João Ricardo Faria & Miguel León-Ledesma, 2000. "Testing the Balassa-Samuelson Effect: Implications for Growth and PPP," Studies in Economics 0008, School of Economics, University of Kent.
    4. Vipul Bhatt & Arvind Virmani, 2005. "Global integration of India's Money Market : Interest rate parity in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 164, Indian Council for Research on International Economic Relations, New Delhi, India.
    5. 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. M. Govinda Rao & Sen, Tapas Kumar & Jena, Pratap R., 2008. "Issues before the thirteenth finance commission," Working Papers 08/55, National Institute of Public Finance and Policy.
    2. 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.
    3. Gargi Sanati, 2010. "Integration of India’s Financial Markets on the Domestic and International Fronts: An Emperical Analysis of the Post-Liberalisation Period. June 2010," Working Papers id:3097, eSocialSciences.


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