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Can Indian Economy Withstand Potential Risks From International Capital Flows?

    31 March , 2022         Fdiindia

Can Indian Economy Withstand Potential Risks From International Capital Flows?

The International Monetary Fund (IMF) released a report in March outlining the key proposals that have been made to consider capital control strategies to help countries cope with large or volatile flows of money. The IMF suggested on Wednesday (March 30) that governments have an array of options available to them when considering this policy—from reserve requirements, tax policies, and foreign exchange intervention to loan-to-deposit restrictions and interest controls.

They help insure against some kinds of risks. There are many benefits for countries from having capital funds flow in and out of India,” IMF First Deputy Managing Director Gita Gopinath said in a statement Wednesday based on a paper that was released on the Review of the Institutional View (IV) on the Liberalization and Management of Capital Flows. “In this context, we recommend that countries diversify their exposure to different types of financial flows within acceptable limits.”

The IMF treasury and other member countries are increasingly aware that the IV may not always be there when needed. Policymakers have implemented new measures over recent years allowing the IMF more to do that, including the pre-emptive use of capital flow measures on inflows if financial vulnerabilities exist, and also, it’s crucially important to prevent inward spillovers by controlling or reducing outflows. In response to a question, Gopinath answered that there are other kinds of financial risks associated with having large amounts of capital inflows.

"In the case of India there are already a number of restrictions in place when it comes to capital. Even if there were never any restrictions on how much money you could take out of the country, sometimes things aren't that simple.The Indian government is pretty proactive when it comes to external borrowing instruments and they tend to use them as an instrument while they consider changing circumstances. As long as firms offer a high-quality spread, companies will invest money in India."

The top IMF official, an Indian American, said the capital flows are desirable because they can bring substantial benefits. “Preemptive capital flow management measures and macro prudential policy to restrict inflows can mitigate risks from external debt. Yet they should not be used in a manner that leads to excessive distortions, nor should they substitute for necessary macro-economic and structural policies or views to keep currencies excessively weak,” Gopinath said.


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