Capital Mobility Based on Onshore-Offshore Arbitrage: Empirical Evidence from India and China

In this paper, we empirically examine the changes over time in the degree of capital mobility for India and China. We find that the somewhat haphazard process of capital account liberalisation undertaken by the Indian and Chinese authorities gets reflected in large variations in Covered Interest Parity (CIP) deviations overtime. In recent years, the deviations have become smaller and the no-arbitrage bands have become narrower, implying greater capital mobility for both the countries. However, compared to India, China's capital controls still seem to bind. Over the years, India has achieved greater capital mobility compared to China.