Monday, March 10, 2008

Assorted on Capital Flows, etc

International Financial Integration through the Law of One Price: The Role of Liquidity and Capital Controls

Managing Capital Flows: The Case of Indonesia

Managing Capital Flows: The Case of Malaysia

Managing Capital Flows: The Case of the Philippines

Nonsensical arguments against capital controls

On global cash flows issue you can jump in without drowning

Reaping the Benefits of Financial Globalization

Cost of India’s Burgeoning Foreign Exchange Reserves: What to Do With So Many Reserves?
Looking at some of the domestic and external economic indicators, India seems to have come a long way since the 1991 balance of payment crisis. The liberalization process started in the 1980s giving an impetus to exports and oil imports. This lead to trade and current account deficits which were mainly financed by high-cost short-term external commercial loans. Medium and long-term external commercial loans also rose. By 1990, the debt-service ratio rose to 35.3% while the ratios of short-term debt to forex reserves and debt to current receipts reached highs of 382.1% and 328.9%. In 1991, political instability at home and a global oil price spike led to further deterioration in the trade and current account deficits, falling to -3% and -3.1% of GDP, even as export growth and remittances declined. Downgraded credit ratings harmed investor sentiment as short-term investors and Non-Resident Indians (NRI) withdrew money from the country and foreign banks were reluctant to roll-over debt. Trying to defend the currency, the Reserve Bank of India’s (RBI) foreign currency assets fell from $3.1 bn in August 1990 to $975 mn in July 1991, inadequate to fund even three weeks of imports. Economic growth and industrial output slowed and inflation surged. India pledged gold to the Bank of England to finance its imports and also sought bilateral and IMF assistance to repay its debt to avoid rescheduling.

However, the crisis paved way for further liberalization of the economy and since then trade, foreign investment and exchange rate reforms have been undertaken. Post-2002, booming economic growth, domestic investment activity, eased restrictions on capital flows and interest rate differentials have led to a rise in FDI, portfolio investment, NRI deposits and external commercial borrowings (ECBs) by domestic firms, leading to a surplus on capital account. However, the country runs trade and current account deficits due to oil and non-oil imports, not withstanding the growth in exports (esp. in services) and remittances. Apart from the surge in these capital inflows, RBI has been resistant to exchange rate appreciation to protect exports, though India is a domestic demand driven economy, and structural factors more than currency value constrain export growth. This has resulted in the rapid growth in forex reserves from a mere $5.8 bn in 1991 (Fiscal Year in India is from April-March) to $76 bn in 2002, $141 bn in 2004, $199 bn in 2006 to close to $290 bn by Feb 2008. Foreign investment followed by External Commercial Borrowings by domestic firms have accounted for this rise in forex reserves.

Are Capital Controls in the Foreign Exchange Market Effective?

Thaksin, Capital Controls, and the Reserve Bank

Has the strategy of bringing back capital controls worked?

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