Large capital inflows can hit India's exports: Finmin

Large capital inflows leading to rupee appreciation can hit India's exports which have seen a smart recovery in the first six months of the current fiscal, a Finance Ministry analysis said today.

"The main implication of large capital flows to India has been buoyancy in stock markets and appreciation of the rupee vis-a-vis the US dollar... The appreciating rupee can have adverse impact on the earnings of exporters and makes exports less competitive," mid-year analysis of economy said.

The analysis which was placed in Parliament said the widening trade deficit has also been a matter of some concern. India's exports during April-September aggregated to $103.65 billion registering a year-on-year growth of 28 per cent.

However, cumulative value of imports during the same period was $166.48 billion showing an annual expansion of 29.9 per cent.

The trade deficit for the first half of 2010-11 was $62.83 billion, up 33.2 per cent from the previous corresponding period.

Total capital inflows were of the order of $37.4 billion in the first half of the current fiscal. In the previous fiscal as a whole, these inflows were $53.6 billion.

"The surge in the capital inflows in recent years raises the question whether the inflows are in access of domestic absorptive capacity, which could lead to overheating of the economy," the review said.

However, there is a positive side to the phenomenon. The appreciating rupee "is an anti-inflationary tool as it makes imports of oil, which form 30 per cent of India's total import basket, cheaper."