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

Ajay Shah () and Ila Patnaik ()

No 11387, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2005-05
Note: IFM
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Published as India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit , Ajay Shah, Ila Patnaik. in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences , Edwards. 2007

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