Capital inflows to impact monetary management

RBI'S MACROECONOMIC AND MONETARY DEVELOPMENT REPORT

An expected increase in capital inflows to India could put upward pressure on asset prices and the exchange rate and also influence domestic liquidity conditions which will have implications for monetary management, the Reserve Bank of India said in its Macroeconomic and Monetary Development Review for 2009-10.

According to the review, all signs point to an increase in capital flows to the country during 2010-11, which will be driven by both ‘push’ and ‘pull’ factors.

While the push factors for surge in capital inflows include excess global liquidity accompanied by low interest rates leading to search for higher yield, the pull factors include buoyant growth prospects, favourable interest rate differential and relaxation of the external commercial borrowing norms for 3G spectrum.

According to RBI, the increase in capital inflows may put pressure on asset prices and exchange rates.

Global commodity price trends, particularly the likely firming up of oil prices, could exert pressures on balance of payments through higher imports.

“For dealing with the external shocks transmitting through various accounts of balance of payments, it is important to have adequate foreign exchange reserves,” the review said.

The revival in capital inflows, which started at the beginning of 2009-10 and gathered momentum in second and third quarters, remained buoyant in the last quarter.

Foreign direct investment rose marginally in the period (April 2009 to February 2010) to $33.1 billion (Rs 140,850 crore at today’s rates) compared to $31.3 billion (Rs 139,500 crore) in the corresponding period last year.

Inflows under portfolio investment were led by large purchases of equities by foreign institutional investors (FIIs) in the Indian stock market and the revival in net inflows under American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) due to the resurgence in stock prices of Indian companies.

Foreign institutional investment in the country swung to a net inflow of $29 billion in 2009-10 from a net outflow of $15 billion in the previous year.

ADR and GDR issuances by Indian companies nearly tripled to $3.3 billion in 2009-10 from $1.2 billion in the previous year.

Foreign currency loans availed by Indian companies also grew from $17.2 billion in 2008-09 to $21.7 billion in 2009-10.

“Stronger recovery in 2009-10 ahead of the global economy coupled with positive sentiments of global investors about India’s growth prospects are the factors that underline the momentum of sustained capital inflows during the year,” the review said.