An interview with Reserve Bank of India governor YV Reddy
Indian policy-makers may quietly raise a cheer if the flood of foreign capital into India slackens as a result of the global economic slowdown and the credit crunch.
Many believe that excessive inflows are behind the economic overheating of the last year (ended March 2007): growth peaked at 9.6%, prompting the government to impose restrictions on foreign borrowings by Indian companies last August; foreign portfolio investors meanwhile were forced to register onshore with the Indian securities regulator rather than trade Indian securities offshore. Until early April, inflows had hardly diminished.
“They [capital inflows] are still robust. India is still a very attractive destination. After having told the world we are open to investment, I don’t think we can tell the world ‘don’t send capital to India’,” finance minister P Chidambaram says in an interview with Emerging Markets. “We will have to manage it.”
Indian companies have been eagerly borrowing overseas and foreign portfolio capital, and Indian stocks remains strong. In the nine months to December 2007 capital inflows shot up to $82 billion, almost 2.7 times what India received in the whole of the previous year. JP Morgan Chase reckons that the capital account surplus in India’s balance of payments may have surged to $104 billion, or about 8.9% of GDP.
Net foreign portfolio investment and net foreign borrowings by Indian companies and banks (external commercial borrowings) added up to a staggering $49.3 billion, or 65% of the increase in India’s foreign exchange reserves. At end March those reserves totalled $304.7 billion.
What prevents the economy from being able to absorb large doses of foreign capital? “It’s simply a matter of governance. If we are able to offer more projects and quicken the pace of implementation, the absorptive capacity [of the economy] will increase. Our state governments do not have enough projects on the shelf,” says Chidambaram. “Second, the time taken to implement projects is longer in India than elsewhere.”
Now that the economy is slowing down, will the restrictions imposed last year on Indian companies that wish to borrow abroad be lifted? “There is no change in the policy. We said if you raise money abroad, spend it abroad. By and large most (Indian) companies are willing to live with that. As long as they don’t bring the money into India, it does not create problems for the RBI’s [Reserve Bank of India] monetary management,” Chidambaram points out. —K.R.