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Vulnerability of Emerging Market Economies to Exogenous Shocks

The transmission of global demand, oil supply and monetary policy shocks on the Indian economy are empirically examined using a parsimonious structural vector autoregression model for the period 1996 to 2016. Global demand shocks exert the most dominant effect causing fluctuations in various macroeconomic variables, whereas global monetary policy spillovers play an important role in affecting domestic short-term interest rates and financial asset prices. Global oil supply shocks, given its relative weightage as an intermediate input, have a greater impact on wholesale price index inflation than on consumer price index inflation. Given the rising trade and financial integration of the Indian economy, a quantitative impact analysis of these global shocks assumes importance for macroeconomic and monetary policy frameworks.

Changing Contours of Capital Flows to India

The Indian experience with capital flows during the period 1950s to the first decade of this century reveals a paradigm shift from a prolonged period of capital scarcity to one of surplus, however characterised by a volatile pattern of inflows. The key structural aspects include a significant shift from official to private capital flows and from debt to non-debt flows. Non-resident Indian deposits show considerable sensitivity to interest and exchange rate fluctuations. The corporate preference for overseas borrowings is predominantly influenced by domestic activity; but the persistence of interest rate arbitrage and global credit market shocks also have a significant impact. Foreign institutional investment inflows and stock prices have a bidirectional causal relationship with a time varying nature of the stock price volatility. Volatile capital flows rather than trade flows seem to drive real exchange rate movements with consequences for the real economy.
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