Excess Dollar Supply Propped The Exchange Rate

A resumption in capital flows, surplus on the invisibles account and sluggish trade have resulted in a huge surplus of $6,795 million in the balance of payments (BoP) during 996-97.

A fall out of this was a situation of excess dollar supply leading to exchange rate stability, a build-up of the Reserve Banks foreign exchange reserves to $5,818 by March 31, 1997, and rising sustainability of the external debt servicing situation.

Led by strong growth in private transfers and software exports, the net surplus under invisibles increased by 59 per cent to $8,686 million. The bulk transfer of the India Development Bonds which matured last year to residents enhanced these remittances.

 

Miscellaneous receipts comprising mainly technology-related exports rose by about 40 per cent. Moreover, profits and dividends continued to be re-invested in the country.

The increase in net investment income payments to $3,900 million in 1996-97 from $3,205 million in 1995-96, was more than offset by the buoyancy in private transfers and non-factor services.

Since strong growth in invisible receipts more than compensated the sluggish export growth, the degree of openness (measured by the ratio of current receipts to GDP) continued to strengthen to 15.6 per cent. It was 8.5 per cent in 1990-91. The ratio determines the viability of the countrys external sector a higher degree of openness lowers the debt service ratio and also permits the economy a higher current account deficit.

Net invisibles financed 70 per cent of trade deficit in 1996-97 as against 48 per cent in 1995-96. This contained the current account deficit at $3,730 million in 1996-97 as against $5,899 million in 1995-96.

As a proportion of GDP, the current account deficit narrowed from 1.8 per cent in 1995-96 to 1 per cent in 1996-97. Debt to GDP ratio has declined to 26 per cent in 1996-97 from 28.7 per cent in 1995-96.

Debt service ratio was marginally higher at 25.4 in 1996-97 from 24.3 per cent in 1995-96, the increase being entirely on account of bullet redemption of India Development Bonds.

The central bank has pointed out that as non-debt creating flows acquire a dominant role in external financing, the sustainability of external payments needs to be assessed in terms of total servicing, that is, servicing of both debt and non-debt flows.

The capital account continued to exhibit buoyancy in 1996-97 and more than offset the capital repayments scheduled for the year.

Net capital flows amounted to $10,525 million in 1996-97 which more than doubled from that of the preceding year. The narrowing of the current account deficit coupled with the doubling of capital inflows resulted in a large overall surplus of $6,795 million during the year.

Despite sluggish imports, drawals under commercial borrowings increased from $4,252 million to $6,650 million. Amortisation, too, was higher at $6,423 million mainly on account of the bullet repayment of India Development Bonds of $2,203 million.

The need to finance the rising petroleum and oil bill resulted in significant increase in drawals under short-term borrowings. While drawals increased to $7,072 million in 1996-97, repayments were also higher and net borrowings were $833 million.

Foreign investment flows continued to dominate the capital account accounting for nearly 50 per cent of the external financing need. Foreign direct investments (other than NRI investments) rose to $2,057 million from $1,418 million in 1995-96.

Under portfolio investments, fresh inflows of funds from foreign institutional investors in India was $1,926 million in 1996-97. In this year, Indian corporates raised $918 million. Inflows under various offshore funds and other schemes fell to $20 million, from $56 million in the previous year.

NRIs invested $639 million in 1996-97 under the direct invest scheme of the RBI. There was also a larger net inflow under all the existing non resident deposit schemes.

Outflows under the erstwhile FCNR(A) scheme was $1,949 million. This however was more than compensated for by inflows under the various NRI schemes of $1,782 million under FCNR(B), $2,253 million under NRNR, and $1,353 million under the NRE.

The outstanding balances under the three schemes stood at $ 7,505 million in FCNR(B), $5,092 million in NRNR, and $5,611 million in NRE.

Total net inflow under all the NRI deposit schemes was $3,439 million in 1996-97 which was higher than that of $944 million in 1995-96.