Financial Openness and External Sector Management: The Indian Experiences

The financial sector of an economy, comprising institutions, markets and instruments, is multi-dimensional in nature with both domestic and external facets. The broad contours of financial liberalization approach include, viz., (i) withdrawal of credit controls and excessively high reserve requirements; (ii) interest rate deregulation; (iii) privatization; (iv) deregulation and development of markets; (v) lowering of entry barriers, limits on participation of foreign banks, and restrictions on specialization or diversification of banks; and (vi) easing of restrictions on international financial transactions, such as on current and capital account convertibility, and the use of multiple exchange rates. Thus, financial openness is a subject of features, characterizing financial liberalization. While it is widely accepted that reduction or removal of the financial repression and financial openness enhances efficiency and potential growth of an economy, however, there is no such unanimity regarding the pace and sequence of reforms. Though, the initial condition of the economy undoubtedly would influence the pace and sequence of desirable policy changes or reforms, the paper deals with detailed discussion of the benefits and cost of reforms in charting out the optimal pace and roadmap in India.