Indian Express
Sign In | Register Now
Newsletter | ePaper
Indian Express >  Op-Ed > 

A capital idea

Font Size
Ila Patnaik Posted: Apr 08, 2008 at 2308 hrs IST
Related Stories: China doesn’t show the wayAnd Bihar still doesn't get itEngineering of the rupeeNo free lunches hereHome is where the dollar goes
In mid-2007, there were two competing views about India’s capital flows “problem”. According to the first view, India is able to calibrate capital flows, to be able to selectively switch off or on certain components of capital flows and thus achieve a judicious mix and quantity of capital flows.

Going by the alternative view, India is too open today for this central planning mentality to work. If one door is closed, money will move through other doors, as long as the basic reason for money to move is unchanged. In this view, small changes to capital controls are ineffective and not worth the political cost. The only thing that would work in affecting capital flows is far-reaching and draconian capital controls.

In 2007, the traditional view supporting capital controls won the policy debate. In August, restrictions were brought in against external commercial borrowing and in October, restrictions were brought in against portfolio flows. The world economy took a turn for the worse, which normally reduces capital flows into emerging markets. But US interest rates have dropped, and even though India pegs the rupee to the dollar, Indian interest rates have not dropped. This interest rate differential has been pulling money into India.

Ads By Google
It is now time to look at the evidence, to take stock of the impact. Did events work out as the policy makers hoped?

In Q2 USD 33.5 billion net capital inflows came to India. In Q3, net capital inflows were USD 31.5 billion. This was despite the turmoil in global financial markets in which capital was moving away from risky assets and emerging economies like India are seen as more risky.

Q1 2007 (April-June) is the old, undistorted environment. By Q2, capital controls against ECB were in place. In most of Q3, controls against portfolio flows were also in place. The evidence shows that these did not work. In Q2 and Q3, net capital inflow was roughly twice that seen in Q1. It rose from an average inflow of about USD 3 billion per month in the quarters preceding July 2007, to USD 10 billion per month after July.

The restriction on Participatory Notes (PNs) imposed in October 2007 does not appeared to have reduced portfolio flows into India. Portfolio flows grew from USD 10.89 billion in the second quarter to USD 14.56 billion in the third quarter.

Despite various restrictions on External Commercial Borrowings (ECBs) inflows on account of ECB went up from USD 4.7 billion in the second quarter to USD 5.26 billion in the third quarter. Short-term loans remained high. They were USD 4.79 billion in the second quarter, and USD 4.25 billion in the third quarter.

... contd.

Ads By Google
Post Comments
Message*
Maximum characters allowed     
 
Name* Email ID*
Subject* Country*
TERMS OF USE:
The views, opinions and comments posted are your, and are not endorsed by this website. You shall be solely responsible for the comment posted here. The website reserves the right to delete, reject, or otherwise remove any views, opinions and comments posted or part thereof. You shall ensure that the comment is not inflammatory, abusive, derogatory, defamatory &/or obscene, or contain pornographic matter and/or does not constitute hate mail, or violate privacy of any person (s) or breach confidentiality or otherwise is illegal, immoral or contrary to public policy. Nor should it contain anything infringing copyright &/or intellectual property rights of any person(s).
I agree to the terms of use.
View all Messages [ 0 ]
View all Messages [ 0 ]
Group Websites : Express India | Financial Express | Screen India | Loksatta | Kashmir Live | Biz Publications
Privacy Policy | Feedback | Site MapThe Indian Express Group | Work With Us | Adverise With Us | Contact Us© 2008 Indian Express Newspapers (Mumbai) Ltd. All rights reserved
*Recipient(s) name *
*Recipient(s) e-mail address *
(Separate addresses by commas)
*Your Name *
*Your e-mail address *
Select your Country
Comments(optional)

The name(s) and e-mail address(es) you provide will
not be used for any purpose other than to inform the
recipient(s) of your identity. (*mandatory field)
 
Close