India's Challenge on Managing External Sectors with the Sterilization of Capital Flows

Abstract

The integration of India with the global financial system has expose Indian economy's external sectors to a harsh reality of capital flows. Among the capital flows, many are a global unaccounted risk and uncertainties. Systematic study to understand real and nominal impact of the flows in the economy has not been much looked upon. The paper uses a model of Australian Open Economy used by LBP (Lal, Berry and Pant) to understand the significance of sterilized capital flows with respect to its absorption in the economy, contributing to economic growth in India. The paper also examines the extent to which the policy measures are a cushion to hedge on the stress and crisis.

Keywords:

• Sterilization
• absorption
• capital flow
• capital formation
• FII
• FDI