Mumbai: Foreign money inflows to India reduced sharply in 2008-09 as the global financial meltdown forced investors to squirrel away their money in risk-free assets in developed markets, new data from the Reserve Bank of India shows.
The central bank’s monthly bulletin for May says total foreign inflows to India fell nearly 70% from a year ago to $19.7 billion (Rs97,121 crore) in 2008-09, the lowest in the past four years.
The fall was mainly due to a $13 billion outflow of the so-called portfolio investments or money invested in Indian stocks and depository receipts. Even as the world financial system reeled under the impact of toxic debt following the collapse of Lehman Brothers Holdings Inc. in mid-September, foreign institutional investors pulled out money from emerging markets, including India in a flight to safer assets such as US treasury papers.
Similarly, earnings of foreign companies that are reinvested in their Indian businesses fell by a third to $4.7 billion, as they put new projects on hold due to the global economic slowdown.
The impact on total foreign inflows would have been worse, but for direct investments, which propped up the overall numbers. Foreign direct investment was at $33.6 billion for 2008-09, only around 2% down from the previous year’s figures.
Foreign direct investment is typically planned over a longer time and the projects for which money was pumped in during 2008-09 would have been planned two-three years in advance. “The continuation of projects show that investors continue to believe in the medium-term growth story of India even if in the short term there are asset price corrections,” said Jahangir Aziz, executive director and chief economist in India for JPMorganChase and Co. “It also goes to show that foreign direct investors did not face the kind of credit crunch that portfolio investors faced.”
Portfolio outflows continued throughout the year. Though they were the sharpest during the October-December quarter, the outflows somewhat abated in the January-March quarter as markets around the world revived a bit on a stream of good news such as better home sales in the US and new bailout plans from the Obama administration. So far, in the current fiscal year, foreign portfolio investors have pumped in some $2.5 billion, according to the markets regulator Securities and Exchange Board of India.