The IMF's World Economic Outlook has a chapter on capital inflows which is highly relevant for contemporary Indian debates on macro policy. They have done interesting empirical work in the form of examining a database of episodes of high capital inflows.
I hate to give you a sound bite when you should read the full chapter, but if there's a quick summary it is this. The wrong thing to do in response to a capital surge is: capital controls and sterilised intervention. In other words, the bulk of the Indian monetary policy response is wrong. The right thing to do in response to a capital surge according to the WEO is: fiscal consolidation.
Menzie Chinn has written a nice blog entry about it, and Andy Mukherjee links it to recent developments in Asia.
Coping with capital inflows has always been a chicken an egg problem and in the absence of fiscal consolidation. To sterlize or not to sterlize.... has always been the regulator's nightmare ceterus paribus fiscal efforts. Inflationery pressure v/s currency appreciation, either can be mitigated by better fiscal management which unleashes productivity and pressures inflation down.
ReplyDeleteBut isn't that a political will (or sometimes ability to do so) issue?
MY INDIAN VIEW
ReplyDeleteSterlizing or controling the capital inflows from the FIIS or FDIs is not the right way to tackle liquidity in the market...In the India Case, the rumour of the tightening of the P-NOTES i.e. participatory notes or Further restricting FDIs are bad practices from the higher authorities...The realisation of the Demand in next 20 Years for Each-and-Every basic aminity such as Infrastructure, Electricity,Fuel in INDIA made it one of the most preferred Destination for value Investing. Though valuations of the indian bourses look soo stretched bt As US Dollar weaking, it seems the attractiveness of the Indian economy and Indian Companies is set to attract more such funds in the near term...in my view, for india Coping with Capital Inflows can be done by two ways. First can be done by hiking the Stamp duty of the Trade on the bourses such CHINA did few months back in order to restrict their people to trade with the Stock Markets...Second can be the Hike in the repo rates..becoz 50 bps hike in the current level can possibly suck more than 17,000 Cr. out from the system....In my View At this juncture, we need one more hike in the reppo rates. Alluding to Rupee Appreciation, RBI should buy more US Dollars..
The attractiveness of the Indian Stock markets is not primarily due to the overall attractiveness of India as a destination but the fact that good paper is scarce.The kind of focussed investment in 10 or 15 stocks has led to a situation called as a "corner" in stock market circles in these stocks.The old response to this situation used to be removing these stocks from derivative segment and marking them only for delivery.The present rules prevent the regulators from taking this step.In fact the whole racket started with the introduction of a number os stocks with dubious balance sheets such as RNRL on the derivative market.
ReplyDelete