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

A+| A| A-

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.

H ave the existing capital controls in India become ineffective? Has de facto nancial integration advanced to an extent that monetary autonomy is lost? Has the time come to let the exchange rate oat freely? These questions have surfaced frequently in the past two years, dening the argument for full capital account convertibility and the critique of monetary and exchange rate policies. Set in the theoretical logic of the trilemma, the extent of nancial integration has been advocated as the evidence: it is argued that the rise in capital mobility has made existing controls ineffective, eroding the central banks inuence over the short-term interest rate; it is time, therefore, to abandon the managed exchange rate regime to regain monetary control. Occasionally, the argument gets rephrased to say that India already has de facto convertibility, so why manage the exchange rate?

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Or

To gain instant access to this article (download).


Pay
INR 59

(Readers in India)


Pay
$ 6

(Readers outside India)

Support Us

Your Support will ensure EPW’s financial viability and sustainability.

The EPW produces independent and public-spirited scholarship and analyses of contemporary affairs every week. EPW is one of the few publications that keep alive the spirit of intellectual inquiry in the Indian media.

Often described as a publication with a “social conscience,” EPW has never shied away from taking strong editorial positions. Our publication is free from political pressure, or commercial interests. Our editorial independence is our pride.

We rely on your support to continue the endeavour of highlighting the challenges faced by the disadvantaged, writings from the margins, and scholarship on the most pertinent issues that concern contemporary Indian society.

Every contribution is valuable for our future.