Capital flows to emerging mkts, including India, to continue

The upswing in private capital flows to emerging market economies, including India, is likely to continue for another five years driven by high interest rates, robust growth prospects and improved fundamentals.

According to a report by DB Research, a part of the German banking major Deutsche Bank, the current "upswing in private capital flows to the EM (emerging market) that started in April 2009, following the G20 meeting, may only be in its early stages and may have another five years to run".

The report further said capital will be pushed out of developed markets due to extended period of unprecedentedly low interest rates, sub-par economic growth and higher financial risks into emerging market economies which are at a much stable position.

Besides, at a time when developed markets are being downgraded, the emerging markets are being upgraded, this in turn has enthused greater "strategic" asset allocation to emerging market by developed market institutional investors.

Moreover, large forex reserves and flexible exchange- -rates and favourable foreign-currency mismatches provide the emerging markets with significant buffers in the event of a "sudden stop" in capital inflows.

The level of capital flows to the BRICs differs markedly. Brazil has been experiencing the highest level of inflows during 2009-10 due to its more open capital markets compared to China and India.

Both China and Russia are experiencing lower levels of gross capital inflows (and, indeed, much higher levels of gross private outflows) than Brazil. But large current - account-related inflows contribute to much larger balance -of-payments surpluses in both countries, the report said.

India falls somewhere in between Brazil, on the one hand, and China and Russia, on the other hand, as regards its capacity and the perceived need to absorb (smaller) external surpluses, it added.

However, Brazil's forex reserves do remain well below those of the other BRICs. Concerns over "excess" currency appreciation and rising sensitivity to a "sudden stop" have contributed to Brazil's decision to incrementally tighten controls on capital inflows.

Their greater capacity and willingness to prevent nominal currency appreciation have resulted in greater official reserve accumulation, the report said.

As a result, China and Russia perceive less of a need to tighten controls on capital inflows than Brazil, whose capital account is very open and whose currency has appreciated tangibly, from weak immediate-post-crisis levels, it added.