Nishtha Khurana

Crisis prevention and capital controls in India: Perspectives of capital account liberalisation in the current scenario

33 pages · 6.05 EUR
(December 2008)

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Nishtha Khurana then deals with “Crisis prevention and capital controls in India: perspectives of capital account liberalisation in the current scenario”. She starts with the observation that India with its long standing capital controls now eyes a full capital account liberalisation by 2009–10, and that further reforms are gradually being put in place including the opening to portfolio investments as capital inflows. Khurana argues that portfolio investments are volatile and any kind of volatile flows make the developing economies vulnerable to financial crisis. The chapter analyses the capital controls in India and the potential risk of a financial crisis and/or a recession hitting the Indian economy under the current scenarios. For this purpose, an analysis of the exchange rate regime, the stock market and the banking sector is undertaken to find out points of risk. It is revealed that the exchange rate in India is quasi-fixed and not market determined as contended by the central bank. It is argued that stock markets are likely to crash in the near future plunging the Indian economy into a recession. The banking sector at present does not constitute a major risk but at the same time is suffering from inherent weaknesses. Finally, the author concludes that time is not yet ripe for full capital account convertibility in India.