Challenges to Monetary Policy from Financial Globalization: The Case of India

45 Pages Posted: 1 Jul 2008

See all articles by Charles Kramer

Charles Kramer

International Monetary Fund (IMF) - Capital Markets and Financial Studies Research Department

Hélène Poirson

International Monetary Fund (IMF) - Research Department

A. Prasad

International Monetary Fund (IMF)

Date Written: May 2008

Abstract

The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication - sometimes prompted by a shift to an IT regime - have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.

Keywords: Working Paper, India, Monetary policy, Globalization, Capital inflows, Economic conditions, Domestic liquidity, Liquidity management

Suggested Citation

Kramer, Charles F. and Poirson Ward, Helene and Prasad, Ananthakrishnan, Challenges to Monetary Policy from Financial Globalization: The Case of India (May 2008). IMF Working Papers, Vol. , pp. 1-43, 2008. Available at SSRN: https://ssrn.com/abstract=1154293

Charles F. Kramer (Contact Author)

International Monetary Fund (IMF) - Capital Markets and Financial Studies Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6348 (Phone)
202-623-6339 (Fax)

Helene Poirson Ward

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ananthakrishnan Prasad

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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