Revival in capital inflows on the cards

The Macroeconomic and Monetary Developments — First Quarter Review 2009-10, released by the Reserve Bank of India (RBI) today, suggests a revival of capital flows.

This is because of India’s relatively better macro-economic performance in 2008-09 on the back of various fiscal and monetary stimulus measures and global investors’ perception about India’s growth potential.

Portfolio investments — comprising mainly foreign institutional investments and issuance of American depository receipts/global depository receipts — led to largescale outflows, mainly on account of sale of equity by foreign institutional investors (FIIs).

Net external commercial borrowing (ECB) inflows slowed as disbursements more than halved from the previous year’s level, reflecting transmission of shocks from the credit freeze in advanced economies, said the RBI report.

Despite the higher net inflows in NRI (non-resident Indian) deposits following hikes in ceiling interest rates, banking capital flows turned negative, mainly due to outflows on account of foreign assets of commercial banks and overseas borrowings.

The report said financing of short-term trade credit was not a significant problem in India, contrary to the market perception, as gross disbursements reached $39.7 billion during 2008-09 (they were $48.9 billion in 2007-08). This was facilitated by various policy measures such as hike in the all-in-cost ceilings for trade credits of various maturities.

It further said that the impact of an unprecedented external shock on India’s balance-of-payment (BoP) situation was managed with a reserve loss of only $20.1 billion, without resorting to any extraordinary measure. In fact, the capital account was further liberalised in certain areas such as outward FDI (foreign direct investment) and buyback of FCCBs (foreign currency convertible bonds), RBI said..

During 2008-09, India’s foreign exchange reserves declined $58.0 billion, down from $309.7 billion at the end of March 2008 to $251.7 billion at the end of March 2009. Of this, $37.9 billion was on account of valuation changes and the balance, $20.1 billion, reflected the financing needs of the BoP.

After recording deficit in three successive quarters of 2008-09, the current account in India’s BoP turned surplus in the last quarter. The negative growth in exports that had started during the third quarter of 2008-09 became more pronounced in the fourth quarter (-24.2 per cent).

Incidentally, the import growth also turned negative (-27.3 per cent) during the same quarter after a gap of almost seven years, driven mainly by lower crude oil prices and lower non-oil imports mirroring subdued domestic economic activity. As a result, the trade deficit moderated during the fourth quarter of 2008-09

During 2008-09, India’s external debt increased by $5.3 billion (2.4 per cent) to $229.9 billion at the end of March 2009 over the level at the end of March 2008. This was essentially due to increase in trade credits. Long-term debt increased $2.9 billion at the end of March 2009, mainly due to increase in buyers’ credit.

Debt sustainability indicators remained comfortable at the end of of March 2009 since the debt service ratio, which has been declining steadily over the years, stood at 4.6 per cent at the end of March 2009. The ratio of short-term to total debt, however, increased marginally to 21.5 per cent at the end of March 2009, from 20.9 per cent at the end of March 2008.