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India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit

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  • Ajay Shah
  • Ila Patnaik
Abstract
From the early 1990s onwards, India has engaged in policies involving trade liberalisation, strong controls on debt flows, and encouragement for portfolio flows and FDI, under a pegged exchange rate regime. Domestic institutional factors have led to relatively little FDI and substantial portfolio flows. There has been significant tension between capital flows and the currency regime. Many tactical details of the intricate reforms to the capital controls derive from the interlocking relationships between monetary policy, the currency regime and capital flows. In the recent period, pegging has given a capital outflow through reserves accumulation which was larger than the substantial net private capital inflows. In March 2004, difficulties of pegging appear to have led to a near-tripling of the nominal rupee-dollar returns volatility, which has reduced outward capital flows. The goal of the early 1990s - of finding a consistent way to augment investment using current account deficits - has remained elusive.

Suggested Citation

  • Ajay Shah & Ila Patnaik, 2005. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Working Papers 11387, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11387
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain & Singh, Nirvikar, 2009. "Indian capital control liberalization: Evidence from NDF markets," Working Papers 09/60, National Institute of Public Finance and Policy.
    2. Patnaik, Ila & Shah, Ajay, 2010. "Does the currency regime shape unhedged currency exposure?," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 760-769, September.
    3. Sahoo, Manoranjan & babu, M. Suresh & Dash, Umakant, 2016. "Current account sustainability in SAARC economies: Evidence from combined cointegration approach," MPRA Paper 79014, University Library of Munich, Germany, revised 2016.
    4. Ila Patnaik, 2007. "The Indian Currency Regime and its Consequences," Working Papers id:1062, eSocialSciences.
    5. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    6. Sahoo, Manoranjan & Babu, M. Suresh & Dash, Umakant, 2016. "Long run sustainability of current account balance of China and India: New evidence from combined cointegration test," MPRA Paper 79013, University Library of Munich, Germany, revised 2016.
    7. Patnaik, Ila & Shah, Ajay, 2013. "The investment technology of foreign and domestic institutional investors in an emerging market," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 65-88.
    8. Ila Patnaik & Ajay Shah & Nirvikar Singh, 2013. "Foreign Investors under Stress: Evidence From India," International Finance, Wiley Blackwell, vol. 16(2), pages 213-244, June.
    9. Michael M Hutchison & Gurnain Kaur Pasricha & Nirvikar Singh, 2012. "Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(3), pages 395-438, September.
    10. Ajay Shah & Ila Patnaik, 2010. "Managing Capital Flows: The Case of India," Chapters, in: Masahiro Kawai & Mario B. Lamberte (ed.), Managing Capital Flows, chapter 9, Edward Elgar Publishing.
    11. Abhijit Sen Gupta, 2008. "Does capital account openness lower inflation?," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 471-487.
    12. Bracke, Thierry & Bunda, Irina, 2011. "Exchange rate anchoring - Is there still a de facto US dollar standard?," Working Paper Series 1353, European Central Bank.
    13. Buiter, Willem & Patel, Urjit R., 2006. "India's Public Finances: Excessive Budget Deficits, a Government-Abused Financial System and Fiscal Rules," CEPR Discussion Papers 5502, C.E.P.R. Discussion Papers.
    14. Philip Lane & Sergio Schmukler, 2007. "The Evolving Role of China and India in the Global Financial System," Open Economies Review, Springer, vol. 18(4), pages 499-520, September.
    15. Ila Patnaik & Ajay Shah, 2012. "Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(3), pages 439-464, September.
    16. Patnaik, Ila & Shah, Ajay, 2010. "Why India Choked when Lehman Broke," India Policy Forum, National Council of Applied Economic Research, vol. 6(1), pages 39-72.
    17. repec:rim:rimwps:41-07 is not listed on IDEAS
    18. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
    19. Shah, Ajay & Patnaik, Ila, 2011. "India's financial globalisation," Working Papers 11/79, National Institute of Public Finance and Policy.
    20. Arvind Virmani, 2009. "Macro-economic management of the Indian economy: capital flows, interest rates, and inflation," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 189-214.
    21. Tony Cavoli, 2006. "The Extent of Exchange Rate Flexibility in India: Basket Pegger or Closet US Dollar Pegger?," Working Papers id:424, eSocialSciences.
    22. Mark Holmes & Theodore Panagiotidis & Abhijit Sharma, 2011. "The sustainability of India's current account," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 219-229.
    23. Debashis Chakraborty & Jaydeep Mukherjee & Tanaya Sinha, 2012. "Is there any Long-run Relationship between India’s Current and Capital Account Balance? A Time Series Analysis," Global Business Review, International Management Institute, vol. 13(3), pages 433-447, October.
    24. Ma, Guonan & McCauley, Robert N., 2013. "Is China or India more financially open?," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 6-27.
    25. Abhijit Sen Gupta, 2007. "Does Capital Account Openness Lower Inflation?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 191, Indian Council for Research on International Economic Relations, New Delhi, India.

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