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Steve Brito, Mr. Nicolas E Magud, and Mr. Sebastian Sosa
We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.
Delong Li, Mr. Nicolas E Magud, and Mr. Fabian Valencia
We examine how firm and country heterogeneity shape the response of corporate investment in emerging markets to changes in global interest rates and volatility. We test for the presence of (i) a financing channel originating from changes in the costs of external borrowing and (ii) a real options channel—reflecting firms’ option values to delay investment. We find evidence of the coexistence of both channels. Financially weaker firms reduce investment by more in response to higher interest rates or volatility, while firms with stronger balance sheets become less willing to invest after volatility spikes. Furthermore, the intensity of the financing channel diminishes for firms in countries with lower public debt, higher foreign reserves, or deeper financial markets.
International Monetary Fund. Asia and Pacific Dept

This Selected Issues paper examines how surges in global financial market volatility spill over to emerging market economies (EMs) including India. The results suggest that a surge in global financial market volatility is transmitted very strongly to key macroeconomic and financial variables of EMs, and the extent of its pass-through increases with the depth of external balance-sheet linkages between advanced countries and EMs. The paper also looks at food inflation, which has often been singled out as a key driver of India’s high and persistent inflation.

International Monetary Fund. Asia and Pacific Dept

This Selected Issues paper examines how surges in global financial market volatility spill over to emerging market economies (EMs) including India. The results suggest that a surge in global financial market volatility is transmitted very strongly to key macroeconomic and financial variables of EMs, and the extent of its pass-through increases with the depth of external balance-sheet linkages between advanced countries and EMs. The paper also looks at food inflation, which has often been singled out as a key driver of India’s high and persistent inflation.

International Monetary Fund. Asia and Pacific Dept

This Selected Issues paper analyzes the factors behind the unprecedented widening of India’s current account deficit in terms of the sectoral savings-investment balance. Persistently high inflation is found to have depressed real returns, prompting a surge in gold imports and a marked deterioration in household financial savings. The paper investigates inward and outward spillovers to and from India. The results show that output shocks emanating in globally systemic countries have important global effects, but their impact on India is limited. It is found that shocks originating in India have relatively small global implications, but are very important for several South Asian economies.

International Monetary Fund. Asia and Pacific Dept

This Selected Issues paper analyzes the factors behind the unprecedented widening of India’s current account deficit in terms of the sectoral savings-investment balance. Persistently high inflation is found to have depressed real returns, prompting a surge in gold imports and a marked deterioration in household financial savings. The paper investigates inward and outward spillovers to and from India. The results show that output shocks emanating in globally systemic countries have important global effects, but their impact on India is limited. It is found that shocks originating in India have relatively small global implications, but are very important for several South Asian economies.

Kiichi Tokuoka
Since the global financial crisis, corporate investment has been weak in India. Sluggish corporate investment would not only moderate growth from the demand side but also constrain growth from the supply side over time. Against this background, this paper analyzes the reasons for the slowdown and discusses how India can boost corporate investment, using both macro and firm-level micro data. Analysis of macro data indicates that macroeconomic factors can largely explain corporate investment but that they do not appear to account fully for recent weak performance, suggesting a key role of the business environment in reviving corporate investment. Analysis of micro panel data suggests that improving the business environment by reducing costs of doing business, improving financial access, and developing infrastructure, could stimulate corporate investment.
Michael Walton, Anusha Nath, and Mr. Ashoka Mody
Some see India’s corporate sector as the fundamental driver of recent and future prosperity. Others see it as a source of excessive market power, personal enrichment, and influence over the State, with an ultimately distorting influence. To inform this debate, this paper analyses the correlates of profitability of firms listed on the Bombay Stock Exchange, covering a dynamic period-in terms of firm entry and growth-from the early 1990s to the late 2000s. Overall, the results do not provide support for the systematic exercise of market power via the product market. At least for this period, the story is more consistent with a competitive and dynamic business sector, despite the continued dominance of business houses and public sector firms in terms of sales and assets. Those with opposing views can, with justification, argue that our analysis does not cover influences, such as corporate governance and state-corporate relations, which may paint a less flattering picture of the corporate sector’s role. Those broader themes deserve further attention.