In defence of financial globalisation

Source: The post is based on the article “In defence of financial globalisation” published in Business Standard on 28^th February 2023.

Syllabus: GS 3 – Globalization

Relevance: issues associated with financial globalization

News: The article discusses the reasons why some countries fear financial globalization and what measures are needed to overcome the fear.

Why some countries fear financial globalisation?

They fear financial globalizations due to: a) Exchange rate distortions, b) Uncertainties associated with the global financial flows, c) Loss of autonomy of monetary policy.

These countries point to the recent aggressive monetary tightening by the US Federal Reserve.

For example, when central banks of developed markets increase interest rates, global capital leaves developing countries which leads to currency depreciation and inflation.

However, decisions cannot be made by just looking at one problem and there are measures available to tackle these issues.

What are the different measures available against the fear of financial globalizations?

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.

Therefore, better thinking and more capable institutions are required to cope up with uncertainties.

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.

Why does India need globalization?

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.

What is the way ahead?

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.