ABSTRACT
This chapter explains on a cautious approach to Capital account liberalization (CAL) in emerging market economies (EME)s such as India. The traditional advocacy of CAL is crucially contingent on the efficient markets hypothesis (EMH), which is likely to overstate the benefits of CAL for economic growth. Empirical studies fail to demonstrate any clear and convincing evidence of a favourable impact of CAL on growth and, even where such effects are detected, they are circumscribed by a host of conditioning factors including level of economic development, institutional quality and sequencing of reforms. CAL poses very real threats to financial stability and monetary policy autonomy, especially for countries with weak regulatory mechanisms and undeveloped financial markets. Capital inflows create several special problems for the conduct of monetary policy, as well. As a matter of fact, the famous 'trilemma' succinctly sums up the various issues involved.
