Description
Abstract: This chapter examines how market data can be used to infer the impact of capital controls using data from India. Estimations for different sub-periods are used to infer the evolving impact of controls that have changed over time in a complex and piecemeal manner. We use deviations from covered interest parity utilizing data from one-month and three-month offshore non-deliverable forward (NDF) markets for the Indian rupee. Using a non-linear estimation methodology, we estimate no-arbitrage bands whose boundaries are determined by transactions costs and by the effectiveness of capital controls. We find some evidence that recent capital control liberalization in India has been reflected in greater arbitrage through NDF markets.