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    Management of Capital Flows in India

    Gupta, Abhijit Sen; Sengupta, Rajeswari | March 2013
    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 fuelling 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.
    Citation
    Gupta, Abhijit Sen; Sengupta, Rajeswari. 2013. Management of Capital Flows in India. © Asian Development Bank. http://hdl.handle.net/11540/2093. License: CC BY 3.0 IGO.
    Keywords
    Macroeconomic
    Macroeconomic Analysis
    Macroeconomic Framework
    Macroeconomic Models
    Macroeconomic Performance
    Macroeconomic Planning
    Macroeconomic Policies
    Macroeconomic Reform
    Macroeconomic Stabilization
    Social condition
    Economic dependence
    Economic assistance
    International monetary relations
    International monetary relations
    International trade
    National accounting
    Market
    Exchange
    Comparative economics
    Index number
    Monetary policy
    Value analysis
    Adjustment cost
    Transaction cost
    Conditionality
    International relations
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    Citable URI
    http://hdl.handle.net/11540/2093
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    Author
    Gupta, Abhijit Sen
    Sengupta, Rajeswari
    Theme
    Economics
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise