India needs continued efforts on spending side

As that current account deficit gets smaller, the need for foreign capital shrinks as well, which is good because the availability of foreign capital is diminishing. But India needs foreign capital for domestic investment as well. So, there is a need for foreign direct investment, not such a great need for portfolio inflows.

What we are seeing in terms of international capital flows is revealing just how integrated India is into the global economy. Not on the trade flows side, but on the capital flows side and the reliance here on international capital flows, inflows particularly. That has been an important factor in supporting India’s growth in recent years.

When we think of capital flows to emerging markets, usually how those cycles work is inflows are gradual over a period of time and can become quite large. But when a reduction takes place, it is not gradual but sudden. It actually stops, capital flows stop very suddenly. That is what we seeing now.... The more open the economy is, the more reliant on flows, the greater the shock. India is going through a moderate external shock in terms of funding availability, inflows of capital, and that is going to affect growth.

So, it is not just a balance of payments issue. It is more of how that is going to affect growth. That is something we are concerned about from a growth perspective, not necessarily from a rating perspective. External fundamentals are still quite strong, reserve levels are still very high.