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The IMF Working Paper Beyond Binary: A Policy-Intensity Measure of Capital Flow Management introduces the FinOpen index, a novel measure for 193 countries that quantifies the intensity of capital openness on a daily frequency . Developed to address the limitations of traditional binary indexes, the FinOpen index provides a granular measure of policy intensity within a range of 0 to 1, where higher values indicate greater capital openness. By combining annual assessments from the IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) reports with daily updates, the index captures incremental policy adjustments and short-term dynamics that traditional models often miss.
Pillars of the FinOpen Framework The construction of the index is based on three strategic methodological pillars:
Multidimensional Policy Labeling: Capital Flow Management Measures (CFMs) are categorized across five dimensions: flow category (FDI, portfolio equity/debt), residency, direction (inflows/outflows), measure direction (easing/tightening), and type (administrative, price, quantity, or FX-based).
Disaggregated Subindex Structure: The framework utilizes 12 subindexes for different types of flows and residency, specifically distinguishing between nonresidents’ inflows/outflows and residents’ outflows.
Intensity-Based Quantization: Unlike binary classifications, the FinOpen index quantifies granular policy intensity, ensuring that sequential, low-intensity adjustments—common in countries like India and China—are accurately reflected in the national openness score.
What is the “FinOpen Index” in the context of capital account liberalization? The FinOpen Index is a tool used to measure how easy or difficult a government makes it for money to move in and out of the country. Instead of just saying a country is "open" or "closed," it looks at the specific intensity of rules on a daily basis. It has revealed that these rules change more often than we thought—more frequently than a country changes its currency system, but less often than it changes interest rates. Globally, most countries follow a specific pattern: they are most relaxed about letting foreign investors take their money out, slightly stricter about letting new foreign money in, and the most restrictive about letting their own citizens move money abroad to prevent "capital flight" during a crisis.
Policy Relevance: The India Analysis
The FinOpen index demonstrates that India has followed a gradual, sequential liberalization path that prioritizes stability over rapid openness. India is identified as an active user of CFMs, maintaining a Total FinOpen Index of 0.70 on a scale of 0 to 1. It reflects a moderate level of openness, positioning the nation above many low-income countries (LICs) but below advanced economies and regional peers like Malaysia and Thailand.
Strategic Impact:
Asymmetric Openness Profile: India’s nonresidents’ outflows are the most liberalized ensuring foreign investors can repatriate capital relatively easily, while residents’ outflows remain the most restricted (0.54–0.68), reflecting a cautious approach to domestic capital leaving the country. Nonresidents’ inflows are moderately open (0.68–0.79), with tighter controls on portfolio debt compared to equity.
Sequencing of Market Access: Consistent with global trends, India has liberalized portfolio equity inflows (0.70) more than portfolio debt inflows (0.68), mitigating risks associated with volatile, “hot money” debt flows.
Active Management Style: India is identified as one of the most active users of CFMs among emerging markets, frequently utilizing low-intensity adjustments to manage shocks rather than relying on sharp, high-intensity swings.
Historical Evolution of OFDI: The index tracks India’s shift from administrative approval for Outward Direct Investment (OFDI) (level 0.2) between 1960–1973 to the more structured prohibition-with-permission framework established in 1974.
Follow the full paper here: IMF Working Paper - FinOpen Index