Emerging markets are seen to have been insulated from the worst effects of the crisis because of well regulated financial markets. However, though the process had been reined in by the East Asian crisis, India has been substantially liberalising its capital account. While it has not as yet opted for full capital account convertibility, India has also pushed ahead rapidly in terms of financial liberalization. The result has been that India has attracted substantial capital flows, which, despite a persisting current account deficit, has led to the accumulation of large amounts of foreign reserves. Given that, unlike China, India runs a current account deficit, it has experienced upward pressure on the currency and speculative bubbles in stock and real estate markets. Overall, the Indian experience indicates that financial liberalisation leads to increased external vulnerability, a deflationary macroeconomic stance and increased fragility within the domestic financial sector, combined with a shortfall in credit for sectors like agriculture and small-scale industry.
