Capital inflows: The perils of a bad neighbourhood

India's strong medium-term growth outlook may not suffice for foreign capital to flow, as existing channels that bring global savings to India face turbulence

“Why will global savings not flow to India if India has such strong economic prospects?” is a question commonly posed when India’s balance-of-payments (BoP) deficit is discussed. This deficit, which has led to a sharp and continuing erosion of foreign currency reserves over the past six months, can be bridged by either slowing the economy down, or attracting more foreign capital. India needs foreign capital to sustain its growth rate, and the current global de-risking episode means slower inflows.

Tessellatum readers are familiar with “plumbing problems” that create distortions. For example, that Indian sovereign bonds (which are supposed to be risk-free)