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.

Managing Capital Flows: The case of India

NIPFP Working Paper 52,

Ajay Shah and Ila Patnaik
May, 2008

Abstract
From the early 1990s, India embarked on easing capital controls. Liberalization emphasised 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 uptodate with the defacto 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.

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