Automatic stabilisation

A big oil shock is underway, that will pummel the Indian economy. In my Business Standard column of 16 March, Automatic stabilisation of the economy, I think about how exchange rate depreciation is the critical lever through which the economy copes with such a downturn. Openness to capital flows can give us automatic stabilisation. Without needing knowledge or action in government, in bad times we can get an exchange rate depreciation that stabilises the economy. There is one good place to be in the choices offered under the impossible trinity: inflation targeting + floating exchange rate + open capital account.