Reforming the Indian Financial System

NIPFP Working Paper 80
[PDF]

Ajay Shah and Ila Patnaik
January 2011

India's Financial Globalisation

NIPFP Working Paper 79
[PDF]

Ajay Shah and Ila Patnaik
January 2011

Abstract

India embarked on reintegration with the world economy in the early 1990s. At first, a certain limited opening took place emphasising equity flows by certain kinds of foreign investors. This opening has had myriad interesting implications in terms of both microeconomics and macroeconomics. A dynamic process of change in the economy and in economic policy then came about, with a co-evolution between the system of capital controls, macroeconomic policy, and the internationalisation of firms including the emergence of Indian multi-nationals. Through this process, de facto openness has risen sharply. De facto openness has implied a loss of monetary policy autonomy when exchange rate pegging was attempted. The exchange rate regime has evolved towards greater flexibility.

Monetary Policy Transmission in an Emerging Market Setting

NIPFP Working Paper 78
[PDF]

Rudrani Bhattacharya, Ila Patnaik and Ajay Shah
January 2011

Abstract

Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchange-rate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.

Export Versus FDI in services

NIPFP Working Paper 77
[PDF]

Rudrani Bhattacharya, Ila Patnaik and Ajay Shah
January 2011

Abstract

In the literature on exports and investment, most productive firms are seen to invest abroad. In the Helpman et al. (2004) model, costs of transportation play a critical role in the decision about whether to serve foreign customers by exporting, or by producing abroad. We consider the case of tradable services, where the marginal cost of transport is near zero. We argue that in the purchase of services, buyers face uncertainty about product quality, especially when production is located far away. Firm optimisation then leads less productive firms to self-select themselves for FDI. We test this prediction with data from the Indian software industry, and find support for it.