The second-quarter macroeconomic and monetary development report released by the Reserve Bank of India (RBI) said concerns on the external sector had receded with revival of capital inflows and a modest level of current account deficit.
The report, released on the eve of the second quarterly monetary policy review, also said the 2.62 per cent appreciation in the rupee over the past four months had contributed to an increase in the foreign exchange level. Since March, forex reserves have grown by $32.85 billion, to a total of $285 billion as on October 16.
However, the report cautions that a complex issue bearing on global recovery is the appropriate timing and pace of exit from the current and unprecedented levels of expansionary policy. “While early reversal of easy monetary policy may thwart the incipient recovery, delaying the exit can potentially fuel inflation and inflationary expectations. That, in turn, would push up interest rates, which would militate against sustained growth,” said the report.
It said different timings of the exit from accommodative monetary policy in different countries would result in interest rate differentials, which may mean higher capital flows and exchange rates for emerging markets . Thus, these heightened inflows will need prudent managing in these markets to contain the adverse implications for growth and inflation.
On capital inflow, the report stated there is a revival following a relatively better macroeconomic performance during 2008-09, and positive sentiments of global investors about the growth potential of emerging markets, including India. In particular, portfolio investment, primarily comprising foreign institutional investors’ (FIIs) investments and American Depository Receipts (ADRs)/Global Depository Receipts (GDRs), have witnessed a sharp turnaround from net outflows in the fourth quarter of 2008-09 to net inflows during the first quarter of 2009-10.
During 2009-10, the sharp increase in FII inflows is attributed mainly to the recovery in domestic stock markets following the international trend, and comparatively better growth prospects in India.
However, net inflows under ADRs/GDRs were significantly lower during the first quarter of 2009-10 as compared to the corresponding quarter of the previous year, reflecting continued tightness in liquidity in markets abroad. Similarly, net external commercial borrowings (ECBs) recorded an outflow during the first quarter of 2009-10 as against net inflows during the first quarter of 2008-09. Net banking capital - mainly consisting of foreign assets and liabilities (NRI deposits) of commercial banks less interest payments, etc - were also negative during the first quarter of 2009-10, against a positive net inflow witnessed during the first quarter of 2008-09.
Component-wise, net inward FDI into India remained buoyant during April-June, reflecting a relatively better investment climate. The manufacturing sector continued to attract the most part of FDI (19.2 per cent), followed by real estate activities (15.6 per cent) and financial services.
India has to repay a short-term debt (below one year) of $87 billion in 2009-10, the calculation based on the measure of residual maturity of the outstanding debt - an indicator for assessing the debt service liability in the short run. This includes short-term debt based on original maturity at $43.6 billion and long-term external debt due for payments within one year of $43.9 billion.
Of this $43.9 billion, NRI deposits constitute $32.1 billion. The bulk of NRI deposits (around 70 per cent) are in rupee terms and there have been net accretions of around $2.7 billion during 2009-10 so far (up to September 30).
