Volatile capital flows up at 43.2%

Volatile capital flows vis-à-vis foreign exchange reserves increased in 2005-06 on account of huge foreign portfolio investments and growth in short-term borrowings, according to data released by the Reserve bank of India.

The ratio of volatile capital flows increased to 43.2 per cent at the end of March 2006 from 36.6 per cent a year earlier. The ratio had declined from 146.6 per cent in 1991 to 35.2 per cent in 2004.

Cumulative net investments by foreign institutional investors (FIIs) increased to $45.3 billion at the end of March 2006 from $35.9 billion a year earlier and from $827 million at the end of December 1993.

FII investments in the Indian equity market, which commenced in January 1993, have shown significant increase over the subsequent years. The RBI said the adequacy of reserves to meet import obligations has declined from 14.3 months in 2005 to 11.6 months at the end of March 2006.

Out of the total foreign currency assets of $145.1 billion as on March 31, 2006, $35.2 billion was invested in securities, $65.4 billion deposited with other central banks, BIS and IMF and $44.5 billion deposited with foreign commercial banks.

During July 2004-June 2005, the return on foreign currency assets and gold, after accounting for depreciation, increased to 3.1 per cent from 2.1 per cent during 2003-04, mainly because of the rise in short-term interest rates in the US and lower mark-to-market depreciation on securities.