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

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