Kautilya

External shocks

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dc.contributor.author Goyal, Ashima
dc.date.accessioned 2015-08-17T11:35:29Z
dc.date.available 2015-08-17T11:35:29Z
dc.date.issued 2014-11
dc.identifier.uri http://hdl.handle.net/2275/344
dc.description.abstract After the global financial crisis, India was exposed to many external shocks from commodity prices and foreign capital flows. Although capital flow fluctuations were largely due to global risk-on risk-off factors, a widening current account deficit (CAD) contributed to India's vulnerability to external shocks. The major source of shocks was external, but policy mistakes increased India's vulnerability. These included inadequate attention to sectoral bottlenecks that reduced export growth and domestic financial savings, while substitution away from expensive oil imports was discouraged. Dependence on foreign capital, to finance the CAD, rose while degrees of freedom from continuing capital controls were underutilized to reduce exchange rate volatility and to smooth interest rates. Steep depreciations combined with volatility did not help exporters. Evaluation of measures to stabilize the exchange rate establishes that temporarily taking oil marketing companies demand out of the market was the most effective, since small demand-supply mismatches lead to large currency movements in thin markets. Prudential measures such as increasing position limits, margin requirements are to be preferred to a ban on a market or a transaction-type. If market restrictions become necessary, they should be carefully targeted. Accumulation and use of reserves, use of market information and of signalling can all help implement managed floating. Such an exchange rate regime can contribute to effective inflation targeting without the policy rate rising to reduce depreciation as in the classic interest rate defense. en_US
dc.language.iso en en_US
dc.relation.ispartofseries WP;WP-2014-046
dc.subject External shocks en_US
dc.subject current account deficit en_US
dc.subject exchange rate regime en_US
dc.subject volatility en_US
dc.subject market intervention en_US
dc.title External shocks en_US
dc.type Working Paper en_US


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