This article notes that the use of monetary policy has been constrained by a loose fiscal policy and capital flows. The problem of capital flows is a self-inflicted pain. The Reserve Bank of India (RBI) could have kept a lid on capital flows, allowing only the most urgent inflows from a growth standpoint. This would have given India a competitive edge in manufacturing and would have allowed it to expand labor-intensive industry and help facilitate rapid reductions in poverty. However, the RBI has carried out sterilized intervention with large quasi-fiscal costs. The trade balance and, more often than not, the current account continue to be in deficit. A major cause of this is a misaligned exchange rate—the trigger of this being the capital account of the balance of payments. The article offers numerous research ideas, especially for growth theorists, on how to think about India's (non-labor-intensive) growth pattern vis-a-vis its current exchange rate policy.
Keywords: monetary policy; capital flows; exchange rate; Reserve Bank of India; labor-intensive industry; poverty reduction
Article. 9557 words.
Subjects: Economics ; Industry Studies ; Economic Development and Growth
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