ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles By Renu Kohli

Managing Capital Flows, c.2010: Policy Options for India

With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financial flows are expected to flood emerging markets' shores, including those of India which has positive growth and interestrate differentials vis-à-vis the advanced countries. This article discusses existing policy options for India and concludes by emphasising the need to evolve a medium-term response strategy, one of whose elements include countercyclical fiscal responses.

Supervising the Regulators?

What specific failings, if any, of the current regulatory structure have led to the proposed creation of the Financial Stability and Development Council is a question that needs to be answered by policymakers. Institutional reform is normally triggered by the failure of an existing institution to perform an assigned task or to keep pace with changing times. Has the existing regulatory system coped poorly or not adapted to changes? Looking back, neither institutional failure nor an inability of the present structure to respond to shocks to systemic stability justifies the FSDC.

Financial Integration, Capital Controls and Monetary Independence

It has been argued for India that the increase in capital mobility has made existing controls ineffective, eroding the central bank's influence over the short-term interest rate and that it is time, therefore, to abandon the managed exchange rate regime to regain monetary control. This note shows that the "loss of monetary independence" argument lacks empirical basis. Convergence between India and the rest of the world, though increasing, is as yet incomplete. A variety of tests shows imperfect financial integration, suggesting the Indian economy to be in the intermediate stage, i e, on the transition to full capital mobility, a feature that allows an eclectic monetaryexchange rate policy combination. With no strict trade-offs between the three policy goals posited under the trilemma, there is, as yet, no compromise on monetary independence that would justify a shift towards a free float.

Will Interest Rate Cut Work?

Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.