Analysis of the Capital Account in India's Balance of Payments

The management of the capital account in India's balance of payments has assumed importance in recent years because of the economy's increasing integration into the global financial system. Systematic studies focused on the capital account have not been forthcoming and the current study is an attempt in this direction. A moderate sized simultaneous equation model, encompassing major constituents of the capital account, as well as other macroeconomic sectors, is estimated using annual data over the period 1970-71 to 1998-99. The model is then used to conduct several contrafactual simulations, embracing alternative scenarios. The two major factors impinging on the Indian capital account are changes in world income and in non-interest domestic government expenditure. Monetary measures such as CRR or bank rate changes seem to have limited implications for the capital account as does a proactive policy of real exchange-rate targeting.