Challenges to Monetary Policy from Financial Globalization: The Case of India

Author/Editor: Kramer, Charles Frederick ; Poirson, Hélène ; Prasad, A.
Publication Date: May 01, 2008
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.
Series: Working Paper No. 08/131
Subject(s): India | Monetary policy | Globalization | Capital inflows | Economic conditions | Domestic liquidity | Liquidity management

Author's Keyword(s): capital flows | excess liquidity | financial globalization | India | liquidity management | monetary policy | monetary policy framework
Publication Date: May 01, 2008
Format: Paper
Stock No: WPIEA2008131 Pages: 43
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