Management of Capital Flows in India: 1990-2011

Abhijit Sen Gupta and Rajeswari Sengupta

MPRA Paper from University Library of Munich, Germany

Abstract: Increased integration with global financial markets has amplified the complexity of macroeconomic management in India. The diverse objectives of a robust growth rate, healthy current account deficit, competitive exchange rate, adequate external capital to finance investment, moderate inflation, targeted monetary and credit growth rate, minimizing financial fragilities and maintaining adequate reserves need to be balanced in an era of volatile capital flows. In this paper we analyze India’s experience in negotiating the trade-offs between these varied objectives. We find that to minimize risks associated with financial fragilities India has adopted a calibrated and gradual approach towards opening of the capital account, prioritizing the liberalization of certain flows. Using empirical methods we find that instead of adopting corner solutions, India has embraced an intermediate approach in managing the conflicting objectives of the well-known Impossible Trinity – monetary autonomy, exchange rate stability and an open capital account. Our results indicate that the intermediate approach has been associated with an asymmetric intervention in the foreign exchange market, with the objective of resisting pressures of appreciation, and resulted in large accumulation of reserves. We also show that sterilization of this intervention has been incomplete at times leading to rapid increase in monetary aggregates and fueling inflation. Finally, we conclude that while the greater flexibility in exchange rate since 2007, has allowed pursuit of a more independent monetary policy and the exchange rate to act as a shock absorber, the hands-off approach has resulted in reserves remaining virtually stagnant since 2007, leading to a significant deterioration in the reserve adequacy measures.

Keywords: Capital controls; Macroeconomic trilemma; Financial integration; Foreign exchange intervention; Sterilization; Exchange market pressure; Reserve adequacy. (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 F4 (search for similar items in EconPapers)
Date: 2013-03-15
New Economics Papers: this item is included in nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/46217/1/MPRA_paper_46217.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/53134/1/MPRA_paper_46217.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:46217

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().