Global Financial Crisis, Capital Inflows and Policy Trilemma: An Analysis of the Indian Experience

In the context of the global financial crisis, this article analyzes the behaviour of capital inflows in India during the period from 1993.2 to 2012.4. It also examines the question, how have the policy makers in India dealt with the ‘policy trilemma’ in a regime of liberalized capital inflows? The study finds that the volatility of capital inflows increased after the global financial crisis. Further, due to the global financial crisis, there were substantial changes in the relative importance of the factors that explain capital inflows. Although the ‘pull factors’ played major roles in both the periods, before and after the crisis, there were significant changes in their relative importance. In the first sub-period, real effective exchange rate and foreign exchange reserves played the most important roles in determining the capital inflows whereas in the second sub-period, it was only current account balance. While dealing with ‘policy trilemma’, we observed that the monetary policy independence was maintained in the period before the crisis which was sacrificed in the later period. JEL Classification : F30, F32, F39