India has decoupled to a certain degree from the international financial crisis, as its financial sector - being relatively sound and profitable - was only minimally exposed to critical credit derivates or heavily indebted sovereign debtors. But this insulation came at a certain price, namely a rather shallow market with limited credit supply for the corporate sector - especially small and medium firms - and heavy reliance on foreign exchange reserves as a buffer against economic shocks, which had to be sterilized at the expense of the Reserve Bank and the tax payer and/or exerted a certain upward pressure on the exchange and inflation rate. No wonder that there is a heavy debate raging in official and academic circles of the country whether to open fully the capital account and to allow a greater share of foreign (portfolio) investment) in corporate finance. There is a second and related discussion concerning the future role of India in global financial governance and the appropriate role of the country in the International Monetary Fund. In spite of public concern over the IMF's role in mitigating (ex post) or exacerbating financial crisis in the developing world, the Indian government is not interested in damaging this institution. On the contrary, the strengtheing of its surveillance and crisis intervention power is recommended.
Printer-friendly version
