Capital account openness in India and a comparison with China: Then versus now

Nidhi Aggarwal (), Sanchit Arora () and Rajeswari Sengupta
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Sanchit Arora: Ernst and Young

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Existing evidence shows that over the years, India's capital account has become relatively more open, while the same cannot be said for China. However, with its rising share in the world economy, China has increasingly been pursuing its goal of RMB internationalisation, which concurrently relies on an open capital account. In this paper, we revisit the question and examine the openness of capital accounts of both India and China, the two largest emerging economies. Using more than 15 years of daily return differentials in the non-deliverable currency forward (NDF) market vis-a-vis the onshore spot market, we find that the somewhat haphazard process of capital account opening undertaken by the Indian authorities is reflected in large variations in covered interest parity (CIP) deviations across the period. In recent years the deviations have become smaller and the no-arbitrage bands have become narrower, implying greater financial integration and lower effectiveness of existing capital controls Applying our methodology to China, we find that though China has liberalised its capital account over time, its capital controls still bind. Our analysis shows that India's capital account continues to remain substantially more open than that of China's.

Keywords: Capital account openness; Financial integration; Covered interest parity; Capital controls; Foreign exchange market (search for similar items in EconPapers)
JEL-codes: F30 F31 F32 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2022-05
New Economics Papers: this item is included in nep-cna, nep-mon and nep-opm
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