Capital controls as a means of minimising speculative bubbles in real exchange rates: key features of the literature and its application to China and India

Economic Papers (Economic Society of Australia), Sept, 2003 by Craig Applegate

In conclusion, if India's policy priority is to maintain smooth adjustments in its real exchange rate, then it should tighten restrictions on new portfolio investment by foreigners while simultaneously further liberalising direct foreign investment.

7 Conclusions

Moderate controls on capital flows tend not to be able to prevent exchange rate speculation from occurring. China and India both have systems of relatively strict invoice-based capital controls that are largely effective in closing avenues for exchange rate speculation. If these countries would like to continue to prevent exchange rate speculation, then these controls should be maintained with minor amendments. Without such adjustments, China could become susceptible to a possible refusal by foreigners to roll over their loans while India could become susceptible to a withdrawal of foreign portfolio equity investment.

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