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Journalism of Courage
The International Monetary Fund,or IMF,has historically been hawkish on capital controls. Countries that use them,the IMF worries,wind up artificially undervaluing their currencies. In the Indian case,too,most economists have long argued against harsh capital controls; but,often,a concern for exporters and attempts to use the value of the rupee as a variable in managing trade policy have factored into decision-making. For a long time,these economists had the IMF on their side. But the IMF has performed something of an about-turn. Unprecedentedly loose monetary policy in the West post-crisis has caused an enormous amount of money to slosh around the international financial system; much of that has headed off in search of higher returns in emerging economies. In response,many of them,such as Brazil,have imposed controls,like special tariffs on monetary inflows.
The IMF,challenged by this new environment,has now released a new policy framework,which reverses its decades-old advice. The new framework acknowledges that,under some circumstances,capital controls might be the right thing to introduce: particularly if the influx of money is obviously caused by temporary or cyclical factors. The Indian monetary authority has been quick to pick up on this. Speaking at the 60th anniversary of the central bank of Sri Lanka,the governor of Indias Reserve Bank,D. Subbarao,said that it is now broadly accepted that there could be circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows.
