| Introduction: Contextual introduction. Body: Explain how financial globalization is integral to India’s aspirations for growth and prosperity. Also write its challenges. Conclusion: Write a way forward. |
Financial globalization as a part of economic globalization, is understood as the integration of a country’s local financial system with international financial markets and institutions. This integration typically requires that governments liberalize the domestic financial sector and the capital account.
Integral to India’s aspirations for growth and prosperity:
- Financial markets become deeper and more sophisticated when they integrate with world markets, increasing the financial alternatives for borrowers and investors. Financial markets operating in a global environment enable international risk diversification.
- The Indian Information Technology (IT) industry has developed due to globalisation. It was one of the US investment banks that invested in the equity of an IT company back in 1993.This led to the development of the IT industries in India at that time when Indian investors didn’t have much knowledge about this industry.
- Further, there is also a need of foreign investment in developing large scale renewable energies in India.
- Moreover, India’s flows of both the current and the capital account have increased because of increase in the international trade.
Challenges:
- Exchange rate distortions:Prices move up and down in all markets to keep demand and supply in balance. Therefore, countries which do not like price volatility, have options to exchange the variable prices for a fixed price and by giving a fee. However, countries require sound thinking in financial economic policy to exchange for fixed prices. In the case of India, there is much to be done on this front.
- Uncertainties associated with the global financial flows:Financial globalization and trade globalization are not different and move together. There are risks associated with both of them but both bring immense benefits for countries.
- Loss of autonomy of monetary policy:Countries like India have adopted inflation targeting to solve this problem. The targeting of 4 percent CPI inflation by the RBI helps it to cut through the exchange rates. Hence, monetary policy autonomy is ensured.
Although globalization brings risks for an economy, it should be adopted because of its huge benefits. Risks can be tackled by coming up with better institutions and policies.
