Macroprudential Policies for the External Sector: India’s Approach and Experience

Viral V Acharya

Chapter 18 in Macro-financial Stability Policy in a Globalised World: Lessons from International Experience:Selected Papers from the Asian Monetary Policy Forum 2021 Special Edition and MAS-BIS Conference, 2023, pp 368-398 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter provides a perspective on India’s approach and experience in its macroprudential policies for the management of its external sector. Section 1 presents the empirical motivation and a conceptual framework for jointly deploying forex reserves and capital controls in the macroprudential policy of a “small” open economy such as India, that is vulnerable to the risk of “sudden stops” in external capital flows. Section 2 discusses how macroprudential policies have been used in India to date, focusing on their recent evolution, particularly since the Global Financial Crisis (GFC). Section 3 provides an event-study analysis of the effectiveness of one specific macroprudential policy adopted by India in the aftermath of the “Taper Tantrum”1 episode of 2013. Throughout, the focus is on external sector flows relating to fixed-income securities only, which come under the purview of the central bank in India (Reserve Bank of India [RBI]); equity investments in India are regulated by the securities exchange board and are largely perceived to be unrestricted except in the case of a few companies which have especially large foreign ownership.

Keywords: Macro-financial Policy; Policy Framework; Macroprudential Policy; Monetary Policy; Fiscal Policy; Capital Flow Management Measure; Capital Control; Foreign Exchange Intervention; Integrated Policies; Multiple Policies; Policy Trade-off; Policy Substitute; Policy Complement; Policy Interaction; Policy Space; Central Bank; International Spillovers; Spillbacks; Sending Country; Receiving Country; Financial Channel; Financial Regulation; Financial Stability; External Stability; Advanced Economy; Emerging Market Economy; Capital Flow; Portfolio Flow; Banking Flow; Exchange Rate; Banking System; Non-bank Financial Institution; United Kingdom; Sweden; China; Hong Kong Sar; India; Indonesia; Korea; Singapore; Latin America; Croatia (search for similar items in EconPapers)
JEL-codes: E E52 E58 E6 F F01 F3 F38 (search for similar items in EconPapers)
Date: 2023
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