Managing Capital Flows: The Case of India
Shah, Ajay; Patnaik, Ila | May 2008
Abstract
From the early 1990s, India embarked on easing capital controls. Liberalization emphasized openness towards equity flows, both FDI and portfolio flows. In particular, there are few barriers in the face of portfolio equity flows. In recent years, a massive increase in the value of foreign ownership of Indian equities has come about, largely reflecting improvements in the size, liquidity and corporate governance of Indian firms. While the system of capital controls appears formidable, the de facto openness on the ground is greater than is apparent, particularly because of the substantial enlargement of the current account. These changes to capital account openness were not accompanied by commensurate monetary policy reform. The monetary policy regime has consisted essentially of a pegged exchange rate to the US dollar throughout. Increasing openness on the capital account, coupled with exchange rate pegging, has led to a substantial loss of monetary policy autonomy. The logical way forward now consists of bringing the de jure capital controls up-to-date with the de facto convertibility, and embarking on reforms of the monetary policy framework so as to shift the focus of monetary policy away from the exchange rate to domestic inflation.
Citation
Shah, Ajay; Patnaik, Ila. 2008. Managing Capital Flows: The Case of India. © Asian Development Bank. http://hdl.handle.net/11540/3687. License: CC BY 3.0 IGO.Keywords
Regional Development Finance
Public Scrutiny of City Finances
Non-Bank Financial Institutions
Local Government Finance
Government Financial Institutions
Foreign and Domestic Financing
Financial Risk Management
Assessing Corporate Governance
Good Governance
Governance Approach
Public Accounting
Business Financing
Subsidies
Social Equity
Economic Equity
Project Risks
Project Impact
Public Administration
Corporations
Investment Requirements
Banks
|Taxing power
Tax administration and procedure
Tax policy
Effect of taxation on labor supply
Decentralization in government
Community power
Corporate divestment
Civil government
Delegation of powers
Equality
Neighborhood government
Subnational governments
Delivery of government services
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