Among the ideas that gained currency and have become part of the conventional wisdom are:
- Fixed exchange rates are not a great idea in the absence of capital controls
- The proportion of short-term debt in external debt is a variable that needs to be monitored
- Financial regulation needs to be of a high quality in an economy exposed to large flows
- A sound banking system and macro-economic stability are key requirements for capital account convertibility
- Credit booms must be monitored and high bank exposures to real estate and the stock market could spell trouble.
- Private capital flows are enormous in volume in relation to the sizes of emerging markets and this asymmetry in itself is potentially destabilising.
India did well at the time of the east Asian crisis because the economy was still relatively insulated. Today, the economy is a lot more open on both the current and capital accounts but against that we have a war chest of $200 bn. So, are we sitting pretty? Yes, but.... I have some concerns about the quality of capital flows over the past year or two.
FDI has shot up but we include private equity and venture capital in our FDI figure; both are relatively volatile compared to MNC investment. ECBs (external commercial borrowings) have also gone up and much of this could be going into real estate.
Read my comments on the Indian situation on the tenth anniversary of the east Asian crisis in my latest ET column.