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Thursday, November 15, 2007

Capital Inflows into India

Ok, this is just a brief piece to say that after a long absence I am once more getting interested in India (or better put finding the time to think more about India, since I have always been and always will be interested in India). I am starting to compile some information. This has mainly been prompted by a recent posting on the Morgan Stanley GEF from Chetan Ahya.

In particular this:

Over the seven weeks ending November 2, 2007, India’s foreign exchange reserves have increased by US$34 billion (annualized inflow of US$250 billion). Indeed, the trailing 12-month sum of FX reserves has increased to US$100 billion. This compares with the average annual increase of US$38 billion over three years prior to these seven weeks. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a very small extent because of conversion of non-dollar reserves into dollars. During the last seven weeks in which FX reserves have shot up, we believe that capital inflows would have been US$35 billion. Out of this, not more than 10% has been on account of FDI inflows. Non-FDI inflows including portfolio equity and external debt inflows form a major part of these inflows.

and this:

While the inflows are pouring in at the annualized run rate of US$250 billion, in our view, currently the country can absorb only about US$40-50 billion of capital inflows annually without causing any concern on attended risks of overheating.

Basically this has all now gone well beyond the old "sizzling India" debate, and there are aspects of what is happening in India which remind me of what I have been seeing in the Baltics (although there are obviously huge differences), especially the danger of the RBI effectively losing control over monetary policy, and how capital inflows and a deteriorating current account situation can provoke inflation and make it hard to achieve a trade balance. This can, of course, completely distort India's economic development, and needs a lot of serious thought.

I am now about to start tracking India again. A first move in this direction is to log this brief piece in Bloomberg this morning:

India's rupee rose for a second day on speculation economic growth that is the fastest among major economies after China will keep drawing overseas investment.

The currency traded near the strongest in almost a decade after Finance Minister Palaniappan Chidambaram said late yesterday that the expansion will be ``about'' 9 percent this year, near the quickest since 1989 in the 12 months through March 2007. Purchases of Indian shares by funds based abroad more than doubled this year from 2006.

``The short-term outlook is quite positive for the rupee as the stock market sentiment remains bullish,'' said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd. in Mumbai. ``We could see further rupee gains in the coming weeks.''

The rupee rose to 39.2950 per dollar as of 12:43 p.m. in Mumbai, according to data compiled by Bloomberg. Its 12.7 percent advance this year is the second-best performance by an Asian currency after the Philippine peso.

The currency may advance to 39.1 in the coming weeks, Rajagopal said. The median forecast of 24 economists in a Bloomberg News survey predicts the rupee will reach 39.21 by year-end and 39 by the end of March 2008.

The Bombay Stock Exchange's Sensitive Index has advanced 4.8 percent this week, after declining 5.4 percent last week. The index is headed for a sixth annual gain as stock purchases by global funds reached a record $16.8 billion this year, compared with $8 billion in 2006.

Asia's third-largest economy has grown an average 8.6 percent since 2004, the fastest pace since independence in 1947.