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

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Optimising the Pace of Capital Account Convertibility

Optimising the Pace of Capital Account Convertibility M J Manohar Rao Balwant Singh The paper formalises the relationship between monetary and exchange rate policy during the process of financial opening; and shows that a rapid opening of the capital account could render an economy vulnerable to speculative attacks. The model is then applied in the current Indian context to determine the optimal pace of capital account convertibility (CAC). The results, obtained using control theory, indicate the urgent need for phasing in CAC gradually because any attempt at 'shock therapy' by exceeding this pace could, under the present circumstances, result in an economic stagnation characterised by low growth, high real rates of interest and overshooting exchange rates.

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