Policy Trade-offs in an Open Economy and the Role of G20 in Global Macroeconomic Policy Coordination



Heightened volatility in capital flows in recent years have complicated macroeconomic management by aggravating real exchange rate misalignment, excesses in credit market, asset price booms and busts, and exacerbating financial fragility, thereby reiterating the need to actively manage capital flows. The recent Global Financial Crisis has also highlighted the need for a coordinated approach across countries in managing capital flows as it is likely to be more effective than unilateral actions, given that any prudential measure adopted to tackle capital flow volatility tend to have cross-border spillover effects, often times putting the burden of adjustment on other countries. India’s experience highlights the adoption of a calibrated approach toward liberalization of the capital to minimize risks associated with financial fragilities and macroeconomic distortions. India has navigated the well-known macroeconomic trilemma by embracing an intermediate approach and balancing the policy objectives as per the demands of the macroeconomic situation. Both domestic and global events have influenced the exchange market pressure indices in India, which has exhibited a great deal of fluctuation, and has primarily been affected by changes in the trade balance, portfolio equity inflows, and stock market fluctuation.


Exchange Rate Gross Domestic Product Real Exchange Rate Capital Flow Capital Account 


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© Springer India 2014

Authors and Affiliations

  1. 1.Visiting FellowIndira Gandhi Institute for Development Research (IGIDR)MumbaiIndia
  2. 2.India Resident MissionAsian Development BankNew DelhiIndia

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