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Capital Flows: Negotiating the Trilemmaand Sequencing Openness
Abhijit Sen Gupta
Senior Economics Officer,India Resident Mission,
Asian Development Bank
Financial Sector Developments, Issues and the Way Forward
Sen Gupta (ADB) Capital Flows 14th Dec 2011 1 / 45
Disclaimer
The views expressed in this presentation are the views of thespeaker and do not necessarily reflect the views or policies ofthe Asian Development Bank (ADB), or its Board of Governors,or the governments they represent. ADB does not guarantee theaccuracy of the data included in this paper and accepts noresponsibility for any consequence of their use. Terminologyused may not necessarily be consistent with ADB official terms.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 2 / 45
Outline
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 3 / 45
Outline
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 3 / 45
Outline
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 3 / 45
Outline
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 3 / 45
Outline
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 3 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
Introduction & Motivation
Introduction & Motivation
Emerging markets have experienced high volatility in capital flows,largely due to factors outside their control. Capital Flows
Such sharp swings create several problems for these countries, andhave rekindled the debate on management of international capital flows.
A country wants to actively manage international capital flows for twomain reasons.
Unbridled capital flows tend to exacerbate financial fragilities, whichcan lead to a crisis.Creates difficulties in macroeconomic management – “Trilemma”
To counter these issues a number of countries have introducedadditional measures regulating the flow of international capital.
In recent years even the IMF has also shown a shift in its doctrine. IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 4 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness
Sequencing of Capital Account Liberalization
In the neo classical framework, capital flows contribute to growth mainly bysupplementing domestic savings.In the endogenous growth framework, capital flows influence growth throughspillovers in the form of technology, skills, introduction of new products,increased efficiency of the domestic financial markets and improved resourceallocation.Since the spillovers and externalities associated with different forms of capitalflows would be different, a pecking order approach to the composition of capitalflows is required.
India prioritized certain kinds of flows and agents in the liberalization process.Shift away from debt to non-debt-creating flows.Use of multiple instruments, including quantitative limits, price based measures andadministrative measures.Restricting short-term debt for trade transactions.Avoiding excessive foreign currency borrowing by domestic entities.Prudential regulations to prevent dollarization of balance sheets of financial sectorintermediaries.Gradual liberalization of permissible avenues for outward investments.
Prioritization of certain flows helped in significantly altering India’s externalliabilities profile. Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 5 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 6 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
India’s Approach to Capital Account Openness Evolution of Various Flows
Evolution of Various Flows
The policy for FDI inflows has been significantly liberalized over the past twodecades.
FDI inflows in India increased from $4.5 billion in 2003-04 to over $38.9 billion in2008-09. FDI Flows
India liberalized outbound FDI in an incremental manner and in recent yearsthere has been a jump in outbound FDI.
India has been more cautious in terms of liberalizing portfolio investment withseparate investment caps on sub accounts of FIIs, individual FII and aggregateFII investment in a company.
Portfolio investment has also witnessed a strong increase since 2004-05 andreached a peak in 2010-11. Portfolio Flows
India has been more conservative in terms of liberalizing debt flows with bothborrowers and lenders having to satisfy eligibility criteria, minimum maturityperiod, cap on all-in-cost payments and end use restrictions.
Despite these restrictions ECB inflows have increased from $5 billion in 2003-04to over $30 billion in 2007-08. ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 7 / 45
Extent of India’s Capital Account Openness
Extent of India’s Capital Account Openness
Given the cautious and calibrated approach, India’s extent ofliberalization has been relatively low compared to other emergingmarkets.
In terms of De Jure openness measures there has been a significantincrease among emerging markets but India has not kept pace with thisliberalization process. De Jure Openness
India has also been on the lower end of the spectrum when openness ismeasured according to the volume of capital flows. De Facto Openness
China, which started as lagging behind India in the 1980s, hasoutstripped India during the last two decades.
However, India’s ranking improves considerably when one looks at NonDebt creating flows. Non Debt
Sen Gupta (ADB) Capital Flows 14th Dec 2011 8 / 45
Extent of India’s Capital Account Openness
Extent of India’s Capital Account Openness
Given the cautious and calibrated approach, India’s extent ofliberalization has been relatively low compared to other emergingmarkets.
In terms of De Jure openness measures there has been a significantincrease among emerging markets but India has not kept pace with thisliberalization process. De Jure Openness
India has also been on the lower end of the spectrum when openness ismeasured according to the volume of capital flows. De Facto Openness
China, which started as lagging behind India in the 1980s, hasoutstripped India during the last two decades.
However, India’s ranking improves considerably when one looks at NonDebt creating flows. Non Debt
Sen Gupta (ADB) Capital Flows 14th Dec 2011 8 / 45
Extent of India’s Capital Account Openness
Extent of India’s Capital Account Openness
Given the cautious and calibrated approach, India’s extent ofliberalization has been relatively low compared to other emergingmarkets.
In terms of De Jure openness measures there has been a significantincrease among emerging markets but India has not kept pace with thisliberalization process. De Jure Openness
India has also been on the lower end of the spectrum when openness ismeasured according to the volume of capital flows. De Facto Openness
China, which started as lagging behind India in the 1980s, hasoutstripped India during the last two decades.
However, India’s ranking improves considerably when one looks at NonDebt creating flows. Non Debt
Sen Gupta (ADB) Capital Flows 14th Dec 2011 8 / 45
Extent of India’s Capital Account Openness
Extent of India’s Capital Account Openness
Given the cautious and calibrated approach, India’s extent ofliberalization has been relatively low compared to other emergingmarkets.
In terms of De Jure openness measures there has been a significantincrease among emerging markets but India has not kept pace with thisliberalization process. De Jure Openness
India has also been on the lower end of the spectrum when openness ismeasured according to the volume of capital flows. De Facto Openness
China, which started as lagging behind India in the 1980s, hasoutstripped India during the last two decades.
However, India’s ranking improves considerably when one looks at NonDebt creating flows. Non Debt
Sen Gupta (ADB) Capital Flows 14th Dec 2011 8 / 45
Extent of India’s Capital Account Openness
Extent of India’s Capital Account Openness
Given the cautious and calibrated approach, India’s extent ofliberalization has been relatively low compared to other emergingmarkets.
In terms of De Jure openness measures there has been a significantincrease among emerging markets but India has not kept pace with thisliberalization process. De Jure Openness
India has also been on the lower end of the spectrum when openness ismeasured according to the volume of capital flows. De Facto Openness
China, which started as lagging behind India in the 1980s, hasoutstripped India during the last two decades.
However, India’s ranking improves considerably when one looks at NonDebt creating flows. Non Debt
Sen Gupta (ADB) Capital Flows 14th Dec 2011 8 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma
India’s Tryst with the Trilemma
Definition (Trilemma)
A country can simultaneously achieve only two of the following three objectives: free capitalflows, an independent monetary policy and a fixed exchange rate.
India, as other countries, seeks to attain these three objectives with varying degrees.Capital flows aid growth by providing external capital to sustain an excess ofinvestment over domestic savings or by financing the current account deficit.A competitive exchange rate helps Indian exports, a large part of which is labourintensive.An independent monetary policy stabilizes the economy in the face of domestic andexogenous shocks.
Focus on this issue by following the methodology outlined in Aizenman et al. (2010).
Sen Gupta (ADB) Capital Flows 14th Dec 2011 9 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 10 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Monetary independence is measured as the inverse of the annualcorrelation of the monthly interest rates between India and the UnitedStates.
MI = 1 − corr(i , i∗) − (−1)
1 − (−1)(1)
The index for Exchange Rate Stability is calculated using the annualstandard deviations of the monthly exchange rate between India and theUnited States.
ERS =0.01
0.01 + σ(∆(ε))(2)
Sen Gupta (ADB) Capital Flows 14th Dec 2011 11 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Monetary independence is measured as the inverse of the annualcorrelation of the monthly interest rates between India and the UnitedStates.
MI = 1 − corr(i , i∗) − (−1)
1 − (−1)(1)
The index for Exchange Rate Stability is calculated using the annualstandard deviations of the monthly exchange rate between India and theUnited States.
ERS =0.01
0.01 + σ(∆(ε))(2)
Sen Gupta (ADB) Capital Flows 14th Dec 2011 11 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Aizenman et al (2010) use de Jure measure developed in Chinn and Ito (2008)to calculate the extent of capital account openness.
It is the actual quantum of flows that creates a conflict between monetaryindependence and exchange rate rigidity and not just the regulations.
We use the de facto measure based on the ratio of absolute value of net capitalflows to GDP.
CapOpen =|CapFlows|
GDP(3)
A possible way to manage the dichotomy between monetary independence andexchange rate stability, over the short-run, is by accumulating or decumulatingreserves.
∆Res =|Intervention|
GDP(4)
We use to diamond charts to look at the Trilemma and measure monetaryindependence, exchange rate rigidity, capital account openness and reserves onthe four vertices. Example
Sen Gupta (ADB) Capital Flows 14th Dec 2011 12 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Aizenman et al (2010) use de Jure measure developed in Chinn and Ito (2008)to calculate the extent of capital account openness.
It is the actual quantum of flows that creates a conflict between monetaryindependence and exchange rate rigidity and not just the regulations.
We use the de facto measure based on the ratio of absolute value of net capitalflows to GDP.
CapOpen =|CapFlows|
GDP(3)
A possible way to manage the dichotomy between monetary independence andexchange rate stability, over the short-run, is by accumulating or decumulatingreserves.
∆Res =|Intervention|
GDP(4)
We use to diamond charts to look at the Trilemma and measure monetaryindependence, exchange rate rigidity, capital account openness and reserves onthe four vertices. Example
Sen Gupta (ADB) Capital Flows 14th Dec 2011 12 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Aizenman et al (2010) use de Jure measure developed in Chinn and Ito (2008)to calculate the extent of capital account openness.
It is the actual quantum of flows that creates a conflict between monetaryindependence and exchange rate rigidity and not just the regulations.
We use the de facto measure based on the ratio of absolute value of net capitalflows to GDP.
CapOpen =|CapFlows|
GDP(3)
A possible way to manage the dichotomy between monetary independence andexchange rate stability, over the short-run, is by accumulating or decumulatingreserves.
∆Res =|Intervention|
GDP(4)
We use to diamond charts to look at the Trilemma and measure monetaryindependence, exchange rate rigidity, capital account openness and reserves onthe four vertices. Example
Sen Gupta (ADB) Capital Flows 14th Dec 2011 12 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Aizenman et al (2010) use de Jure measure developed in Chinn and Ito (2008)to calculate the extent of capital account openness.
It is the actual quantum of flows that creates a conflict between monetaryindependence and exchange rate rigidity and not just the regulations.
We use the de facto measure based on the ratio of absolute value of net capitalflows to GDP.
CapOpen =|CapFlows|
GDP(3)
A possible way to manage the dichotomy between monetary independence andexchange rate stability, over the short-run, is by accumulating or decumulatingreserves.
∆Res =|Intervention|
GDP(4)
We use to diamond charts to look at the Trilemma and measure monetaryindependence, exchange rate rigidity, capital account openness and reserves onthe four vertices. Example
Sen Gupta (ADB) Capital Flows 14th Dec 2011 12 / 45
India’s Tryst with the Trilemma Quantifying the Trilemma
Quantifying the Trilemma
Aizenman et al (2010) use de Jure measure developed in Chinn and Ito (2008)to calculate the extent of capital account openness.
It is the actual quantum of flows that creates a conflict between monetaryindependence and exchange rate rigidity and not just the regulations.
We use the de facto measure based on the ratio of absolute value of net capitalflows to GDP.
CapOpen =|CapFlows|
GDP(3)
A possible way to manage the dichotomy between monetary independence andexchange rate stability, over the short-run, is by accumulating or decumulatingreserves.
∆Res =|Intervention|
GDP(4)
We use to diamond charts to look at the Trilemma and measure monetaryindependence, exchange rate rigidity, capital account openness and reserves onthe four vertices. Example
Sen Gupta (ADB) Capital Flows 14th Dec 2011 12 / 45
India’s Tryst with the Trilemma Indian Experience
Outline
1 Introduction & Motivation
2 India’s Approach to Capital Account OpennessEvolution of Various Flows
3 Extent of India’s Capital Account Openness
4 India’s Tryst with the TrilemmaQuantifying the TrilemmaIndian Experience
5 Conclusion
Sen Gupta (ADB) Capital Flows 14th Dec 2011 13 / 45
India’s Tryst with the Trilemma Indian Experience
The Early 1980s: Limited Openness
Limited extent of internationalcapital movement.
Allowed policymakers to retainboth monetary independenceand exchange rate stability.
Limited degree of internationalreserve accumulation.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1980-81
1981-82
1982-83
1983-84
1984-85
Sen Gupta (ADB) Capital Flows 14th Dec 2011 14 / 45
India’s Tryst with the Trilemma Indian Experience
The Early 1980s: Limited Openness
Limited extent of internationalcapital movement.
Allowed policymakers to retainboth monetary independenceand exchange rate stability.
Limited degree of internationalreserve accumulation.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1980-81
1981-82
1982-83
1983-84
1984-85
Sen Gupta (ADB) Capital Flows 14th Dec 2011 14 / 45
India’s Tryst with the Trilemma Indian Experience
The Early 1980s: Limited Openness
Limited extent of internationalcapital movement.
Allowed policymakers to retainboth monetary independenceand exchange rate stability.
Limited degree of internationalreserve accumulation.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1980-81
1981-82
1982-83
1983-84
1984-85
Sen Gupta (ADB) Capital Flows 14th Dec 2011 14 / 45
India’s Tryst with the Trilemma Indian Experience
The Late 1980s: Deterioration in MacroeconomicHealth
The current account deficit increased dueto partial liberalization of imports, a spike inoil prices due to the Gulf crisis andeconomic deterioration in major exportmarkets.
Some of the capital controls were relaxed,and the current account deficit startedbeing financed by non-resident remittancesand borrowings at commercial terms.
While medium and long-term debts morethan quadrupled, short-term external debtincreased to $6 billion during this periodcompared to reserve holdings of only $2billion.
These steps did not prevent thedeterioration of the balance of paymentsand a full blown crisis broke out in 1991.
The crisis was resolved by a combinationof devaluation and borrowing from the IMF.India initiated a move towards a path ofeconomic reform.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1985-86
1986-87
1987-88
1988-89
1989-90
Sen Gupta (ADB) Capital Flows 14th Dec 2011 15 / 45
India’s Tryst with the Trilemma Indian Experience
The Late 1980s: Deterioration in MacroeconomicHealth
The current account deficit increased dueto partial liberalization of imports, a spike inoil prices due to the Gulf crisis andeconomic deterioration in major exportmarkets.
Some of the capital controls were relaxed,and the current account deficit startedbeing financed by non-resident remittancesand borrowings at commercial terms.
While medium and long-term debts morethan quadrupled, short-term external debtincreased to $6 billion during this periodcompared to reserve holdings of only $2billion.
These steps did not prevent thedeterioration of the balance of paymentsand a full blown crisis broke out in 1991.
The crisis was resolved by a combinationof devaluation and borrowing from the IMF.India initiated a move towards a path ofeconomic reform.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1985-86
1986-87
1987-88
1988-89
1989-90
Sen Gupta (ADB) Capital Flows 14th Dec 2011 15 / 45
India’s Tryst with the Trilemma Indian Experience
The Late 1980s: Deterioration in MacroeconomicHealth
The current account deficit increased dueto partial liberalization of imports, a spike inoil prices due to the Gulf crisis andeconomic deterioration in major exportmarkets.
Some of the capital controls were relaxed,and the current account deficit startedbeing financed by non-resident remittancesand borrowings at commercial terms.
While medium and long-term debts morethan quadrupled, short-term external debtincreased to $6 billion during this periodcompared to reserve holdings of only $2billion.
These steps did not prevent thedeterioration of the balance of paymentsand a full blown crisis broke out in 1991.
The crisis was resolved by a combinationof devaluation and borrowing from the IMF.India initiated a move towards a path ofeconomic reform.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1985-86
1986-87
1987-88
1988-89
1989-90
Sen Gupta (ADB) Capital Flows 14th Dec 2011 15 / 45
India’s Tryst with the Trilemma Indian Experience
The Late 1980s: Deterioration in MacroeconomicHealth
The current account deficit increased dueto partial liberalization of imports, a spike inoil prices due to the Gulf crisis andeconomic deterioration in major exportmarkets.
Some of the capital controls were relaxed,and the current account deficit startedbeing financed by non-resident remittancesand borrowings at commercial terms.
While medium and long-term debts morethan quadrupled, short-term external debtincreased to $6 billion during this periodcompared to reserve holdings of only $2billion.
These steps did not prevent thedeterioration of the balance of paymentsand a full blown crisis broke out in 1991.
The crisis was resolved by a combinationof devaluation and borrowing from the IMF.India initiated a move towards a path ofeconomic reform.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1985-86
1986-87
1987-88
1988-89
1989-90
Sen Gupta (ADB) Capital Flows 14th Dec 2011 15 / 45
India’s Tryst with the Trilemma Indian Experience
The Late 1980s: Deterioration in MacroeconomicHealth
The current account deficit increased dueto partial liberalization of imports, a spike inoil prices due to the Gulf crisis andeconomic deterioration in major exportmarkets.
Some of the capital controls were relaxed,and the current account deficit startedbeing financed by non-resident remittancesand borrowings at commercial terms.
While medium and long-term debts morethan quadrupled, short-term external debtincreased to $6 billion during this periodcompared to reserve holdings of only $2billion.
These steps did not prevent thedeterioration of the balance of paymentsand a full blown crisis broke out in 1991.
The crisis was resolved by a combinationof devaluation and borrowing from the IMF.India initiated a move towards a path ofeconomic reform.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1985-86
1986-87
1987-88
1988-89
1989-90
Sen Gupta (ADB) Capital Flows 14th Dec 2011 15 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
1993 to 1995: Confronting the Trilemma
Both push and pull factors led to a surge incapital inflows.
Policymakers faced a choice of eitherallowing nominal exchange rate toappreciate or allowing the money supply tochange.
The Indian authorities chose exchange raterigidity over monetary independence.
The Rupee-Dollar exchange rate remainedsteady at Rs. 31.4 per dollar from Apr 1993to Aug 1995 leading to an ERS of 1.
The RBI intervened heavily causing NFA torise significantly reflected in ∆Res rising to0.48 in 1993-94 and 0.32 in1994-95. Trilemma
Due to paucity of instruments and anilliquid bond market, the RBI could notsterilize the foreign inflows and there was asharp increase in money supply.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1993-94
1994-95
Sen Gupta (ADB) Capital Flows 14th Dec 2011 16 / 45
India’s Tryst with the Trilemma Indian Experience
Late 1990s: Moderation of Capital Flows
The situation reversed in the second half ofthe 1990s with a series of crisis in LatinAmerica and East Asia leading to areduction in capital inflows.
Domestic events also exacerbated thereduction in capital inflows.
These events led to sporadic downwardpressure on the Indian rupee during thisperiod, in response to which the RBIallowed the rupee to depreciate moderatelywith the ERS index indicating a relativelylow value during 1995-96 to 1998-99,ranging between 0.27 and 0.41.
Flexibility in the exchange rate and thelimited volume of capital flows allowed thepolicymaker to reassert monetaryindependence.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1995-96
1996-97
1997-98
1998-99
Sen Gupta (ADB) Capital Flows 14th Dec 2011 17 / 45
India’s Tryst with the Trilemma Indian Experience
Late 1990s: Moderation of Capital Flows
The situation reversed in the second half ofthe 1990s with a series of crisis in LatinAmerica and East Asia leading to areduction in capital inflows.
Domestic events also exacerbated thereduction in capital inflows.
These events led to sporadic downwardpressure on the Indian rupee during thisperiod, in response to which the RBIallowed the rupee to depreciate moderatelywith the ERS index indicating a relativelylow value during 1995-96 to 1998-99,ranging between 0.27 and 0.41.
Flexibility in the exchange rate and thelimited volume of capital flows allowed thepolicymaker to reassert monetaryindependence.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1995-96
1996-97
1997-98
1998-99
Sen Gupta (ADB) Capital Flows 14th Dec 2011 17 / 45
India’s Tryst with the Trilemma Indian Experience
Late 1990s: Moderation of Capital Flows
The situation reversed in the second half ofthe 1990s with a series of crisis in LatinAmerica and East Asia leading to areduction in capital inflows.
Domestic events also exacerbated thereduction in capital inflows.
These events led to sporadic downwardpressure on the Indian rupee during thisperiod, in response to which the RBIallowed the rupee to depreciate moderatelywith the ERS index indicating a relativelylow value during 1995-96 to 1998-99,ranging between 0.27 and 0.41.
Flexibility in the exchange rate and thelimited volume of capital flows allowed thepolicymaker to reassert monetaryindependence.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1995-96
1996-97
1997-98
1998-99
Sen Gupta (ADB) Capital Flows 14th Dec 2011 17 / 45
India’s Tryst with the Trilemma Indian Experience
Late 1990s: Moderation of Capital Flows
The situation reversed in the second half ofthe 1990s with a series of crisis in LatinAmerica and East Asia leading to areduction in capital inflows.
Domestic events also exacerbated thereduction in capital inflows.
These events led to sporadic downwardpressure on the Indian rupee during thisperiod, in response to which the RBIallowed the rupee to depreciate moderatelywith the ERS index indicating a relativelylow value during 1995-96 to 1998-99,ranging between 0.27 and 0.41.
Flexibility in the exchange rate and thelimited volume of capital flows allowed thepolicymaker to reassert monetaryindependence.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1995-96
1996-97
1997-98
1998-99
Sen Gupta (ADB) Capital Flows 14th Dec 2011 17 / 45
India’s Tryst with the Trilemma Indian Experience
Early 2000s: Signs of Capital Flows Revival
The decline in capital inflows continued inearly 2000s and showed signs of revivalonly in 2002-03.
The exchange rate was managed byengineering a moderate depreciation inthese years to achieve a competitiveREER. The ERS index ranged between0.57 and 0.79.
Revival of capital flows and a currentaccount surplus was countered by byactive intervention by the RBI in the foreignexchange market, as it accumulated $40billion of reserves.
Despite attempts to sterilize theseintervention by depleting stock of NDA,there was a steady increase in the growth
rate of reserve money. Management
Monetary Independence was relinquishedto a great extent.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1999-00
2000-01
2001-02
2002-03
Sen Gupta (ADB) Capital Flows 14th Dec 2011 18 / 45
India’s Tryst with the Trilemma Indian Experience
Early 2000s: Signs of Capital Flows Revival
The decline in capital inflows continued inearly 2000s and showed signs of revivalonly in 2002-03.
The exchange rate was managed byengineering a moderate depreciation inthese years to achieve a competitiveREER. The ERS index ranged between0.57 and 0.79.
Revival of capital flows and a currentaccount surplus was countered by byactive intervention by the RBI in the foreignexchange market, as it accumulated $40billion of reserves.
Despite attempts to sterilize theseintervention by depleting stock of NDA,there was a steady increase in the growth
rate of reserve money. Management
Monetary Independence was relinquishedto a great extent.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1999-00
2000-01
2001-02
2002-03
Sen Gupta (ADB) Capital Flows 14th Dec 2011 18 / 45
India’s Tryst with the Trilemma Indian Experience
Early 2000s: Signs of Capital Flows Revival
The decline in capital inflows continued inearly 2000s and showed signs of revivalonly in 2002-03.
The exchange rate was managed byengineering a moderate depreciation inthese years to achieve a competitiveREER. The ERS index ranged between0.57 and 0.79.
Revival of capital flows and a currentaccount surplus was countered by byactive intervention by the RBI in the foreignexchange market, as it accumulated $40billion of reserves.
Despite attempts to sterilize theseintervention by depleting stock of NDA,there was a steady increase in the growth
rate of reserve money. Management
Monetary Independence was relinquishedto a great extent.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1999-00
2000-01
2001-02
2002-03
Sen Gupta (ADB) Capital Flows 14th Dec 2011 18 / 45
India’s Tryst with the Trilemma Indian Experience
Early 2000s: Signs of Capital Flows Revival
The decline in capital inflows continued inearly 2000s and showed signs of revivalonly in 2002-03.
The exchange rate was managed byengineering a moderate depreciation inthese years to achieve a competitiveREER. The ERS index ranged between0.57 and 0.79.
Revival of capital flows and a currentaccount surplus was countered by byactive intervention by the RBI in the foreignexchange market, as it accumulated $40billion of reserves.
Despite attempts to sterilize theseintervention by depleting stock of NDA,there was a steady increase in the growth
rate of reserve money. Management
Monetary Independence was relinquishedto a great extent.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1999-00
2000-01
2001-02
2002-03
Sen Gupta (ADB) Capital Flows 14th Dec 2011 18 / 45
India’s Tryst with the Trilemma Indian Experience
Early 2000s: Signs of Capital Flows Revival
The decline in capital inflows continued inearly 2000s and showed signs of revivalonly in 2002-03.
The exchange rate was managed byengineering a moderate depreciation inthese years to achieve a competitiveREER. The ERS index ranged between0.57 and 0.79.
Revival of capital flows and a currentaccount surplus was countered by byactive intervention by the RBI in the foreignexchange market, as it accumulated $40billion of reserves.
Despite attempts to sterilize theseintervention by depleting stock of NDA,there was a steady increase in the growth
rate of reserve money. Management
Monetary Independence was relinquishedto a great extent.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
1999-00
2000-01
2001-02
2002-03
Sen Gupta (ADB) Capital Flows 14th Dec 2011 18 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The policy trade offs got exacerbated since2003 due to a surge in capital inflows withthe Cap Open index rising to 0.54 in2006-07 and 1 in 2007-08.
The RBI attempted to achieve an‘intermediate regime’, and to prevent theRupee from appreciating rapidly heavilyintervened in the foreign exchange marketresulting in the ∆Res index rising 0.43 in2006-07 and 1 in 2007-08.
While the RBI sterilized some of thisintervention, by end 2003 it ran out ofgovernment bonds, and in January 2004introduced a new instrument.
By August 2005, outstanding MSS bondsrose to Rs. 0.71 trillion, and doubled to Rs.1.4 trillion by December 2007.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 19 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The policy trade offs got exacerbated since2003 due to a surge in capital inflows withthe Cap Open index rising to 0.54 in2006-07 and 1 in 2007-08.
The RBI attempted to achieve an‘intermediate regime’, and to prevent theRupee from appreciating rapidly heavilyintervened in the foreign exchange marketresulting in the ∆Res index rising 0.43 in2006-07 and 1 in 2007-08.
While the RBI sterilized some of thisintervention, by end 2003 it ran out ofgovernment bonds, and in January 2004introduced a new instrument.
By August 2005, outstanding MSS bondsrose to Rs. 0.71 trillion, and doubled to Rs.1.4 trillion by December 2007.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 19 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The policy trade offs got exacerbated since2003 due to a surge in capital inflows withthe Cap Open index rising to 0.54 in2006-07 and 1 in 2007-08.
The RBI attempted to achieve an‘intermediate regime’, and to prevent theRupee from appreciating rapidly heavilyintervened in the foreign exchange marketresulting in the ∆Res index rising 0.43 in2006-07 and 1 in 2007-08.
While the RBI sterilized some of thisintervention, by end 2003 it ran out ofgovernment bonds, and in January 2004introduced a new instrument.
By August 2005, outstanding MSS bondsrose to Rs. 0.71 trillion, and doubled to Rs.1.4 trillion by December 2007.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 19 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The policy trade offs got exacerbated since2003 due to a surge in capital inflows withthe Cap Open index rising to 0.54 in2006-07 and 1 in 2007-08.
The RBI attempted to achieve an‘intermediate regime’, and to prevent theRupee from appreciating rapidly heavilyintervened in the foreign exchange marketresulting in the ∆Res index rising 0.43 in2006-07 and 1 in 2007-08.
While the RBI sterilized some of thisintervention, by end 2003 it ran out ofgovernment bonds, and in January 2004introduced a new instrument.
By August 2005, outstanding MSS bondsrose to Rs. 0.71 trillion, and doubled to Rs.1.4 trillion by December 2007.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 19 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The rising cost of sterilization forced RBI toincompletely sterilize the capital flows,which led to a rise in money supply growth
rate. Management
The RBI tried to control the growth inmoney supply through other instruments.
Measures restricting capital inflows andencouraging outflows were announced.
The Rupee was allowed to appreciate by18% between mid 2005 and end 2007.
Management
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 20 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The rising cost of sterilization forced RBI toincompletely sterilize the capital flows,which led to a rise in money supply growth
rate. Management
The RBI tried to control the growth inmoney supply through other instruments.
Measures restricting capital inflows andencouraging outflows were announced.
The Rupee was allowed to appreciate by18% between mid 2005 and end 2007.
Management
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 20 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The rising cost of sterilization forced RBI toincompletely sterilize the capital flows,which led to a rise in money supply growth
rate. Management
The RBI tried to control the growth inmoney supply through other instruments.
Measures restricting capital inflows andencouraging outflows were announced.
The Rupee was allowed to appreciate by18% between mid 2005 and end 2007.
Management
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 20 / 45
India’s Tryst with the Trilemma Indian Experience
Surge in Capital Flows
The rising cost of sterilization forced RBI toincompletely sterilize the capital flows,which led to a rise in money supply growth
rate. Management
The RBI tried to control the growth inmoney supply through other instruments.
Measures restricting capital inflows andencouraging outflows were announced.
The Rupee was allowed to appreciate by18% between mid 2005 and end 2007.
Management
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2003-04
2004-05
2005-06
2006-07
2007-08
Sen Gupta (ADB) Capital Flows 14th Dec 2011 20 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The outbreak of the sub-prime crisis in theUS and the flight to safety, capital startedflowing out of the Indian economy sincelate 2007 with the Cap Open indexdropping to 0.04 in 2008-09.
Reserves were put into use to stem theoutflow and manage pressure on theexchange rate with ∆Res index being at0.42.
The Rupee was allowed to depreciate by21.2% resulting in the ERS index droppingto 0.27 in 2008-09.
Since mid 2009, resumption of capital flowspushed the Cap Open index to 0.43 during2009-10 and led to RBI imposing certainrestrictions on inflow of capital.
The Rupee was allowed to appreciate bynearly 17.5% between March 2009 andApril 2010 resulting in the ERS indexdropping to 0.35.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 21 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The outbreak of the sub-prime crisis in theUS and the flight to safety, capital startedflowing out of the Indian economy sincelate 2007 with the Cap Open indexdropping to 0.04 in 2008-09.
Reserves were put into use to stem theoutflow and manage pressure on theexchange rate with ∆Res index being at0.42.
The Rupee was allowed to depreciate by21.2% resulting in the ERS index droppingto 0.27 in 2008-09.
Since mid 2009, resumption of capital flowspushed the Cap Open index to 0.43 during2009-10 and led to RBI imposing certainrestrictions on inflow of capital.
The Rupee was allowed to appreciate bynearly 17.5% between March 2009 andApril 2010 resulting in the ERS indexdropping to 0.35.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 21 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The outbreak of the sub-prime crisis in theUS and the flight to safety, capital startedflowing out of the Indian economy sincelate 2007 with the Cap Open indexdropping to 0.04 in 2008-09.
Reserves were put into use to stem theoutflow and manage pressure on theexchange rate with ∆Res index being at0.42.
The Rupee was allowed to depreciate by21.2% resulting in the ERS index droppingto 0.27 in 2008-09.
Since mid 2009, resumption of capital flowspushed the Cap Open index to 0.43 during2009-10 and led to RBI imposing certainrestrictions on inflow of capital.
The Rupee was allowed to appreciate bynearly 17.5% between March 2009 andApril 2010 resulting in the ERS indexdropping to 0.35.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 21 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The outbreak of the sub-prime crisis in theUS and the flight to safety, capital startedflowing out of the Indian economy sincelate 2007 with the Cap Open indexdropping to 0.04 in 2008-09.
Reserves were put into use to stem theoutflow and manage pressure on theexchange rate with ∆Res index being at0.42.
The Rupee was allowed to depreciate by21.2% resulting in the ERS index droppingto 0.27 in 2008-09.
Since mid 2009, resumption of capital flowspushed the Cap Open index to 0.43 during2009-10 and led to RBI imposing certainrestrictions on inflow of capital.
The Rupee was allowed to appreciate bynearly 17.5% between March 2009 andApril 2010 resulting in the ERS indexdropping to 0.35.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 21 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The outbreak of the sub-prime crisis in theUS and the flight to safety, capital startedflowing out of the Indian economy sincelate 2007 with the Cap Open indexdropping to 0.04 in 2008-09.
Reserves were put into use to stem theoutflow and manage pressure on theexchange rate with ∆Res index being at0.42.
The Rupee was allowed to depreciate by21.2% resulting in the ERS index droppingto 0.27 in 2008-09.
Since mid 2009, resumption of capital flowspushed the Cap Open index to 0.43 during2009-10 and led to RBI imposing certainrestrictions on inflow of capital.
The Rupee was allowed to appreciate bynearly 17.5% between March 2009 andApril 2010 resulting in the ERS indexdropping to 0.35.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 21 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Global Financial Crisis and Subsequent Revival
The RBI has refrained from intervening in
the forex market resulting in ∆Res ≈ 0.Prevent interest rate from risinggiven the borrowing requirementsof the government.Intervention and incompletesterilization could lead to a rise ininflationary pressures.Use a strong currency to curbinflationary pressures.
Domestic and external factors contributedto outflow of portfolio investment since May2011, though FDI and debt flows haveremained strong.
The Rupee depreciated by 7% during thefirst half of 2011-12 leading to an ERSindex of 0.29.
Owing to greater exchange rate flexibilitythe RBI was able to assert greatermonetary independence with a rise in theMI index to 0.78 in 2011-12.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
MI
ERS
∆ Res
Cap Open
2008-09
2009-10
2010-11
2011-12*
Sen Gupta (ADB) Capital Flows 14th Dec 2011 22 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
It is evident that India has juggled the various policy choices under thetrilemma according to the macroeconomic needs.
Did India faced trade-offs among the various policy choices?
The absence of a functional form of the nature of trade-offs under thetrilemma can be an obstacle.
Following Aizenman et al. (2010) we test the validity of the linearframework.
2 = αMIt + βERSt + γCapOpent (5)
A relatively high high goodness of fit indicates that the linearspecification explains well the trade-offs among the policy dimensions.
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 23 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
It is evident that India has juggled the various policy choices under thetrilemma according to the macroeconomic needs.
Did India faced trade-offs among the various policy choices?
The absence of a functional form of the nature of trade-offs under thetrilemma can be an obstacle.
Following Aizenman et al. (2010) we test the validity of the linearframework.
2 = αMIt + βERSt + γCapOpent (5)
A relatively high high goodness of fit indicates that the linearspecification explains well the trade-offs among the policy dimensions.
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 23 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
It is evident that India has juggled the various policy choices under thetrilemma according to the macroeconomic needs.
Did India faced trade-offs among the various policy choices?
The absence of a functional form of the nature of trade-offs under thetrilemma can be an obstacle.
Following Aizenman et al. (2010) we test the validity of the linearframework.
2 = αMIt + βERSt + γCapOpent (5)
A relatively high high goodness of fit indicates that the linearspecification explains well the trade-offs among the policy dimensions.
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 23 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
It is evident that India has juggled the various policy choices under thetrilemma according to the macroeconomic needs.
Did India faced trade-offs among the various policy choices?
The absence of a functional form of the nature of trade-offs under thetrilemma can be an obstacle.
Following Aizenman et al. (2010) we test the validity of the linearframework.
2 = αMIt + βERSt + γCapOpent (5)
A relatively high high goodness of fit indicates that the linearspecification explains well the trade-offs among the policy dimensions.
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 23 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
It is evident that India has juggled the various policy choices under thetrilemma according to the macroeconomic needs.
Did India faced trade-offs among the various policy choices?
The absence of a functional form of the nature of trade-offs under thetrilemma can be an obstacle.
Following Aizenman et al. (2010) we test the validity of the linearframework.
2 = αMIt + βERSt + γCapOpent (5)
A relatively high high goodness of fit indicates that the linearspecification explains well the trade-offs among the policy dimensions.
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 23 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent of the policy choice actually implemented by thepolicymakers is given by α̂MI, β̂ERS and γ̂CapOpen. Policy Choices
Monetary indepenendence was accorded the highest priority in early1980s followed by exchange rate stability.
However, rising capital flows and a preference for exchange rate stabilityled to a drop in monetary independence, which bottomed out in 1993-94.
There was a reversal of trend in the mid 1990s with a resurgence ofmonetary independence associated with a dip in exchange rate stability.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
The rise in net capital inflows from 2003-04 was initially associated witha decline in both monetary independence and exchange rate stability.
However, from 2007-08 onwards there has been a sharp increase inmonetary independence with an associated drop in exchange ratestability to manage capital flows.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 24 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
India’s Tryst with the Trilemma Indian Experience
Policy Choices under the Trilemma
The extent to which the Trilemma has been binding in the Indian contextcan be inferred from α̂MI+β̂ERS+γ̂CapOpen. Evolution
A linear specification entails that the cumulative sum can not exceed 2.
We do find that the sum of the predicted values lies below 2 throughmost of our period.
With the RBI targeting the REER, the late 1990s and the early 2000switnessed a secular decline in monetary independence.
There have been periods when the Trilemma has been underutilized.The BOP crisis in 1991 resulted in a sharp drop in the predicted values in 1991-92and 1992-93 as there was a sharp drop in all the three indices.Reduced capital flows as well as lower level of monetary independence meant thatthe the trilemma was not binding for the Indian economy during the late 1990s andearly 2000s.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 25 / 45
Conclusion
Conclusion
India has adopted a gradualist and calibrated approach towardsintegration with the global capital market.
In recent years, India has resorted to the multiple instrument approachwhile dealing with capital flows and adopted an intermediate regimejuggling capital flows, exchange rate stability and monetaryindependence.
This has helped India to manage the policy choices under Trilemma aswell as alter the composition of its liabilities.
This has suited India well as it has been able to maintain a healthygrowth rate, targeted monetary and credit growth rates, moderateinflation rate through most of the period and a sustainable currentaccount deficit.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 26 / 45
Conclusion
Conclusion
India has adopted a gradualist and calibrated approach towardsintegration with the global capital market.
In recent years, India has resorted to the multiple instrument approachwhile dealing with capital flows and adopted an intermediate regimejuggling capital flows, exchange rate stability and monetaryindependence.
This has helped India to manage the policy choices under Trilemma aswell as alter the composition of its liabilities.
This has suited India well as it has been able to maintain a healthygrowth rate, targeted monetary and credit growth rates, moderateinflation rate through most of the period and a sustainable currentaccount deficit.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 26 / 45
Conclusion
Conclusion
India has adopted a gradualist and calibrated approach towardsintegration with the global capital market.
In recent years, India has resorted to the multiple instrument approachwhile dealing with capital flows and adopted an intermediate regimejuggling capital flows, exchange rate stability and monetaryindependence.
This has helped India to manage the policy choices under Trilemma aswell as alter the composition of its liabilities.
This has suited India well as it has been able to maintain a healthygrowth rate, targeted monetary and credit growth rates, moderateinflation rate through most of the period and a sustainable currentaccount deficit.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 26 / 45
Conclusion
Conclusion
India has adopted a gradualist and calibrated approach towardsintegration with the global capital market.
In recent years, India has resorted to the multiple instrument approachwhile dealing with capital flows and adopted an intermediate regimejuggling capital flows, exchange rate stability and monetaryindependence.
This has helped India to manage the policy choices under Trilemma aswell as alter the composition of its liabilities.
This has suited India well as it has been able to maintain a healthygrowth rate, targeted monetary and credit growth rates, moderateinflation rate through most of the period and a sustainable currentaccount deficit.
Sen Gupta (ADB) Capital Flows 14th Dec 2011 26 / 45
Conclusion
THANK YOU !!
Sen Gupta (ADB) Capital Flows 14th Dec 2011 27 / 45
Appendix
Appendix Outline
6 AppendixGlobal Capital Flows to Emerging Market Economies
FDI FlowsPortfolio FlowsECBsDe Jure Measures of OpennessDe Facto Measures of OpennessNon Debt Creating Flows
Composition of LiabilitiesTrinity
ExampleIntervention & SterilizationIntervention & SterilizationEvolution of Policy Choices under the Trilemma
Sen Gupta (ADB) Capital Flows 14th Dec 2011 28 / 45
Appendix Global Capital Flows to Emerging Market Economies
Global Capital Flows to Emerging Markets
IIF RESEARCH NOTE page 3
Capital Flows to Emerging Market Economies
IIF.com © Copyright 2011. The Institute of International Finance, Inc. All rights reserved.
billion, respectively. For China, inward direct investment inflows have now been far exceeded
by other flows from portfolio investors (both bond and equity investors) and banks.
Our sample of 30 major emerging economies remain significant net capital exporters,
however, reflecting their combined status as current account surplus economies. In
aggregate, net capital outflows from our sample of emerging economies will total about $1.4
trillion per year in 2011-12. Although official reserve accumulation continues to account for
the lion’s share of these flows, net private outflows are on the rise (especially FDI). The
significance of this development is that some net private capital outflows from emerging
economies are likely to end up as flows into other emerging economies, and will thus also
count as net inflows in our dataset, at least in principle. Chinese FDI outflows, for example,
will amount to around $85 billion, net, in 2011 and $105 billion, net, in 2012, and a
significant portion of this will be allocated to other emerging economies. This increasing
tendency for emerging economies to invest in each other is one factor that can explain why
some high frequency indicators of capital flows (such as illustrated in Chart 5, page 6) may
be understating overall inflows in 2011. These high frequency measures typically identify only
net flows from investors in mature economies to recipients in emerging economies.
While we project broad stability in net flows amid a phase of growing global turbulence, we
have also entered a phase when investors are liable to begin to differentiate more between
emerging economies. Countries with more obvious risk characteristics are apt to come
under more pressure. For example, countries with high and rising external borrowing
requirements will probably find themselves unable to attract flows on quite the same
favorable terms as has been the case in recent years, extremely low rates in mature
economies notwithstanding. For example, Turkey’s current account deficit has approached
10% of GDP in recent months (see Chart 13, page 10), which will make it more challenging
for Turkey to attract the necessary net debt inflows without seeing a rise in yields, a weaker
currency or some combination of these two effects.
-2
-1
0
1
2
3
4
1995 1997 1999 2001 2003 2005 2007 2009 2011f
Chart 2Emerging Market Private Capital Inflows, Netpercent of GDP
Bank Lending
FDI
Nonbank Lending
Portfolio Equity
Official reserve
accumulation still accounts
for the lion’s share of
capital outflows, but private
outflows are on the rise
Source: Institute of International Finance Capital Flows
Sen Gupta (ADB) Capital Flows 14th Dec 2011 29 / 45
Appendix Global Capital Flows to Emerging Market Economies
Coping with Surges in Capital Flows 7
IMF
Sen Gupta (ADB) Capital Flows 14th Dec 2011 30 / 45
Appendix Global Capital Flows to Emerging Market Economies
FDI Flows
0
5
10
15
20
25
30
35
40
45
2000-01 2002-03 2004-05 2006-07 2008-09 2010-11
Billio
n $
FDI Inflow
FDI Outflow
FDI Flows
Sen Gupta (ADB) Capital Flows 14th Dec 2011 31 / 45
Appendix Global Capital Flows to Emerging Market Economies
Portfolio Flows
0
50
100
150
200
250
300
2000-01 2002-03 2004-05 2006-07 2008-09 2010-11
Billio
n $
Portfolio Investment Inflow
Portfolio Investment Outflow
Portfolio Flows
Sen Gupta (ADB) Capital Flows 14th Dec 2011 32 / 45
Appendix Global Capital Flows to Emerging Market Economies
ECBs
0
5
10
15
20
25
30
35
2000-01 2002-03 2004-05 2006-07 2008-09 2010-11
Bil
lio
n $
ECB Inflow
ECB Outflow
ECBs
Sen Gupta (ADB) Capital Flows 14th Dec 2011 33 / 45
Appendix Global Capital Flows to Emerging Market Economies
Cross Country Comparison of De Jure Openness
-2
-1
0
1
2
3
ME
X
IDN
MY
S
IRN
TH
A
ISR
ZA
F
AR
G
KO
R
PH
L
JO
R
IND
PE
R
CH
L
TU
R
MA
R
BR
A
CO
L
EG
Y
Median Openness
(a) 1970s
-2
-1
0
1
2
3
IDN
MY
S
TH
A
ME
X
JO
R
PE
R
ISR
KO
R
AR
G
PH
L
IND
TU
R
IRN
PO
L
CH
L
CH
N
MA
R
HU
N
ZA
F
BR
A
CO
L
EG
Y
Median Openness
(b) 1980s
-2
-1
0
1
2
3
IDN
MY
S
PE
R
AR
G
ME
X
PH
L
JO
R
CZ
E
HU
N
TH
A
EG
Y
KO
R
TU
R
ISR
RU
S
MA
R
ZA
F
IND
PO
L
CH
N
CO
L
CH
L
BR
A
IRN
Median Openness
(c) 1990s
-2
-1
0
1
2
3
JO
R
PE
R
EG
Y
CH
L
CZ
E
ISR
HU
N
IDN
ME
X
BR
A
PH
L
PO
L
IRN
MY
S
KO
R
TH
A
RU
S
CO
L
AR
G
CH
N
ZA
F
IND
TU
R
MA
R
Median Openness
(d) 2000sComparison
Sen Gupta (ADB) Capital Flows 14th Dec 2011 34 / 45
Appendix Global Capital Flows to Emerging Market Economies
Cross Country Comparison of De Facto Openness
0%
25%
50%
75%
100%
125%
ISR
JO
R
CH
L
ZA
F
MY
S
PE
R
TA
I
EG
Y
PH
L
KO
R
BR
A
IDN
MA
R
PO
L
CO
L
TH
A
IRN
ME
X
AR
G
TU
R
IND
Median Openness
(a) 1970s
0%
25%
50%
75%
100%
125%
150%
175%
JO
R
ISR
CH
L
MY
S
EG
Y
PH
L
MA
R
TA
I
PE
R
ME
X
AR
G
HU
N
ZA
F
PO
L
BR
A
KO
R
TH
A
IDN
CO
L
TU
R
IRN
IND
CH
N
Median Openness
(b) 1980s
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
JO
R
MY
S
CH
L
RU
S
PH
L
ISR
EG
Y
HU
N
TH
A
CZ
E
PE
R
MA
R
IDN
TA
I
AR
G
PO
L
ME
X
ZA
F
CO
L
BR
A
KO
R
CH
N
TU
R
IND
IRN
Median Openness
(c) 1990s
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
JO
R
HU
N
AR
G
ISR
MY
S
CH
L
CZ
E
RU
S
ZA
F
PH
L
TH
A
MA
R
EG
Y
PE
R
KO
R
PO
L
IDN
BR
A
CO
L
CH
N
TU
R
ME
X
IND
IRN
Median Openness
(d) 2000sComparison
Sen Gupta (ADB) Capital Flows 14th Dec 2011 35 / 45
Appendix Global Capital Flows to Emerging Market Economies
Non Debt Creating Flows
0%
10%
20%
30%
40%
50%
60%
70%
80%
MY
S
CH
L
TH
A
EG
Y
ME
X
PH
L
HU
N
ZA
F
AR
G
JO
R
ISL
BR
A
MA
R
CH
N
IDN
CO
L
PE
R
KO
R
TU
R
IRN
RU
S
IND
PO
L
(a) 1993
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
HU
N
JO
R
MY
S
ZA
F
ISL
CH
L
TH
A
RU
S
MA
R
BR
A
PE
R
PO
L
KO
R
IND
ME
X
PH
L
EG
Y
TU
R
CH
N
IND
CO
L
AR
G
IRN
(b) 2007Comparison
Sen Gupta (ADB) Capital Flows 14th Dec 2011 36 / 45
Appendix Composition of Liabilities
Composition of Liabilities
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(a) India
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(b) Brazil
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(c) China
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(d) Chile
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(e) Korea
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Portfolio FDI Debt
(f) Malaysia
Composition
Sen Gupta (ADB) Capital Flows 14th Dec 2011 37 / 45
Appendix Trinity
Quantifying the Trilemma
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Monetary Independence
Exchange Rate Rigidity
Reserve Accumulation
Capital Account
Openness
Trinity
Sen Gupta (ADB) Capital Flows 14th Dec 2011 38 / 45
Appendix Intervention & Sterilization
1993-1995: Intervention & Sterilization
0%
5%
10%
15%
20%
25%
30%
0
200
400
600
800
1000
1200
1400
1600
Nov-92 May-93 Nov-93 May-94 Nov-94 May-95 Nov-95 May-96 Nov-96
Rs. B
illio
n
Net Foreign Assets
Net Domestic Assets
Reserve Money Growth (Right Axis)
(a) Intervention & Sterilization
20
22
24
26
28
30
32
34
36
38
Nov-92 May-93 Nov-93 May-94 Nov-94 May-95 Nov-95 May-96 Nov-96
Ru
pee D
ollar
Rate
(b) Exchange RateTrilemma
Sen Gupta (ADB) Capital Flows 14th Dec 2011 39 / 45
Appendix Intervention & Sterilization
2000-10: Intervention & Sterilization
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-1000
-800
-600
-400
-200
0
200
400
600
800
Ja
n'0
0
Ju
l'0
0
Ja
n'0
1
Ju
l'0
1
Ja
n'0
2
Ju
l'0
2
Ja
n'0
3
Ju
l'0
3
Ja
n'0
4
Ju
l'0
4
Ja
n'0
5
Ju
l'0
5
Ja
n'0
6
Ju
l'0
6
Ja
n'0
7
Ju
l'0
7
Ja
n'0
8
Ju
l'0
8
Ja
n'0
9
Ju
l'0
9
Ja
n'1
0
Rs. B
illio
n
Foreign Exchange Intervention
Net OMO and MSS Purchase
Reserve Money Growth (Right Axis)
(c) Intervention & Sterilization
38
40
42
44
46
48
50
52
Ja
n'0
0
Ju
l'0
0
Ja
n'0
1
Ju
l'0
1
Ja
n'0
2
Ju
l'0
2
Ja
n'0
3
Ju
l'0
3
Ja
n'0
4
Ju
l'0
4
Ja
n'0
5
Ju
l'0
5
Ja
n'0
6
Ju
l'0
6
Ja
n'0
7
Ju
l'0
7
Ja
n'0
8
Ju
l'0
8
Ja
n'0
9
Ju
l'0
9
Ja
n'1
0
Ru
pee
Do
lla
r R
ate
(d) Exchange Rate
Trilemma Trilemma Trilemma
Sen Gupta (ADB) Capital Flows 14th Dec 2011 40 / 45
Appendix Intervention & Sterilization
Policy Choices
1980-81 1980-81 1992-93 1980-81 1998-99to to to to to
2011-12 1991-92 2011-12 1997-98 2011-12Monetary Independence 1.906*** 2.319** 2.013*** 2.829*** 1.439***
[6.860] [2.582] [4.881] [8.185] [4.402]Exchange Rate Stability 1.510*** 0.763* 1.517*** 0.224* 2.194***
[5.041] [1.616] [4.496] [1.642] [9.316]Capital Account Openness 0.986*** 1.961** 0.909** 1.731* 0.840**Adj R-squared 0.953 0.970 0.931 0.965 0.974Policy Choice
Sen Gupta (ADB) Capital Flows 14th Dec 2011 41 / 45
Appendix Evolution of Policy Choices under the Trilemma
Evolution of Policy Choices: Entire Period
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11
αMI
βERS
γCap Open
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 42 / 45
Appendix Evolution of Policy Choices under the Trilemma
Evolution of Policy Choices: BOP Crisis
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11
αMI
βERS
γCap Open
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 43 / 45
Appendix Evolution of Policy Choices under the Trilemma
Evolution of Policy Choices: Asian Crisis
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11
αMI
βERS
γCap Open
Policy Choices
Sen Gupta (ADB) Capital Flows 14th Dec 2011 44 / 45
Appendix Evolution of Policy Choices under the Trilemma
Cumulative Policy Orientation under Trilemma
0
0.5
1
1.5
2
2.5
1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11
Entire Period
BOP Crisis
Asian Financial Crisis
Trilemma
Sen Gupta (ADB) Capital Flows 14th Dec 2011 45 / 45