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

By Ananthakrishnan Prasad, Charles Frederick Kramer, Helene Poirson

May 1, 2008

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Ananthakrishnan Prasad, Charles Frederick Kramer, and Helene Poirson. Challenges to Monetary Policy from Financial Globalization: The Case of India, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Capital inflows, Exchange rate arrangements, Exchange rates, Open market operations

Keywords: Capital account, Exchange rate volatility, Lower-than-average exchange market pressure, Monetary management, Money market, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/131
Stock No:

WPIEA2008131
ISBN:

9781451869903
ISSN:

1018-5941

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