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    Capital Flows To India

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    Praveen Kumar
    The document discusses the trends and composition of capital flows to India since the 1950s, noting that capital flows were initially restricted but liberalized in the 1980s and further opened up after economic reforms in 1991. It analyzes the benefits of capital flows in financing investment and growth as well as the threats of volatility. India's management of capital flows has focused on gradual liberalization, exchange rate flexibility, and regulation of short-term debt to balance these risks.

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    Capital Flows To India

    Uploaded by

    Praveen Kumar
    23 views13 pages
    The document discusses the trends and composition of capital flows to India since the 1950s, noting that capital flows were initially restricted but liberalized in the 1980s and further opened up after economic reforms in 1991. It analyzes the benefits of capital flows in financing investment and growth as well as the threats of volatility. India's management of capital flows has focused on gradual liberalization, exchange rate flexibility, and regulation of short-term debt to balance these risks.

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    Capital flows to india

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    The document discusses the trends and composition of capital flows to India since the 1950s, noting that capital flows were initially restricted but liberalized in the 1980s and further opened up after economic reforms in 1991. It analyzes the benefits of capital flows in financing investment and growth as well as the threats of volatility. India's management of capital flows has focused on gradual liberalization, exchange rate flexibility, and regulation of short-term debt to balance these risks.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    23 views13 pages

    Capital Flows To India

    Uploaded by

    Praveen Kumar
    The document discusses the trends and composition of capital flows to India since the 1950s, noting that capital flows were initially restricted but liberalized in the 1980s and further opened up after economic reforms in 1991. It analyzes the benefits of capital flows in financing investment and growth as well as the threats of volatility. India's management of capital flows has focused on gradual liberalization, exchange rate flexibility, and regulation of short-term debt to balance these risks.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    Capital Flows t0 India

    BY:
    AIZAT ZHETIBAEBA (647)
    PRAVEEN KUMAR (603)
    Introduction

    A flow of investments in and out of the country

    Benefi ●

    ●
    Allow investors to diversify their risks and
    increase returns.
    Allow residents of recipient countries to

    ts
    finance rapid rates of investment, economic
    growth, and increase consumption.

    Threa Sudden shift in capital flows can be


    ●

    devastating for the recipient countries


    leading to upward pressure on the exchange

    ts
    rate, and overheating of the economy.
    Historical Backdrop

    India’s approach towards capital flows has been


    divided into three phases.
    1950-1980 Capital flows restricted to multilateral
    ●

    and bilateral concessional finance.

    1981-1990
    In context of widening CAD, capital flows
    ●

    supplemented by external commercial loans (short-


    term borrowings and deposits from NRIs).

    Marked by BOP crisis of 1991 and initiation of

    Post 1991
    ●

    reform process (high level committee on BOP,


    C Rangarajan, 1991).
    Findings of the committee

    Deficiencies

    ●
    Inappropriate exchange rate regime.
    ●
    Unsustainable CAD.
    ●
    Rise in short-term debt.

    Reform measures

    ●
    Transition to a market-determined exchange rate regime.
    ●
    Dismantling of trade restrictions.
    ●
    Move towards current account convertibility.
    ●
    Gradual opening up of the capital account.
    ●
    Compositional shift from debt to non-debt-creating flows.
    ●
    Strict regulation of external commercial borrowings(short-term)
    ●
    Discouragement of the volatile element of flows from NRIs.
    Trend and magnitude of capital flows to India

    Net capital inflow was $7.1 billion in 1990/91,


    increased to $45.8 billion in 2006/07, and $108.0
    billion in 2007/08.
    Composition of capital flows
    Non Debt Flows

    Foreign Direct Investment

    ●
    Increase in FDI inflow since 1990s reflect the liberal policy regime and growing investor
    confidence.
    ●
    Concentrated in services sector because of comparative advantage in international trade.

    Foreign portfolio investment

    ●
    Portfolio flows are more volatile, moving in tandem with domestic and international market sentiments.
    ●
    International – very low real long-term rates in advanced economies
    ●
    Domestic – resilient financial sector, liquid capital market, financial performance of corporate sector.
    Non Debt Flows
    Debt-Creating Flows

    External Assistance

    ●
    Consists of external aids flows from bilateral and multilateral sources.
    ●
    Share in total capital flows falling from 31.2% in 1990/91 to 1.9% in 2007/08.

    External Commercial borrowings

    ●
    ECBs rose in later half of 1990s due to strong domestic investment demand, favorable global liquidity conditions, upgrade of
    India’s sovereign credit rating, lower risk on emerging market bonds and upward phase of the capital flow cycle to the EMEs.
    ●
    ECBs contribute 20.5% of net capital flows to India in 2007/08.
    External Debt indicators
    Management of Capital Flows In India

    Importance of the absorption of capital flows.

    The absorption of capital flows limited by the size of the CAD. For India seldom above 2% of GDP.

    Policy Responses

    ●
    Phased liberalisation of the policy framework in relation to current as well as capital account outflows.
    ●
    Foreign exchange market intervention and subsequent sterilisation.
    ●
    Lowering interest rate ceilings on NRI deposits.
    ●
    Management of external debt through prepayment and moderation in the access of corporates and intermediaries to additional
    external debt.
    ●
    Greater flexibility in exchange rate movements.
    Capital flow and Exchange rate management

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