New Delhi: With India’s forex reserve closing in on the $200 billion-mark from just a billion dollars in 1991, there is rising concern over possible exodus of overseas money, which in turn could lead to a sharp fall in asset prices across stock and property markets.
The non-FDI inflows today account for about 75% of the total reserves, which is making the country vulnerable to a possible large-scale flight of foreign investors from the country, economists believe.
Forex reserves are made up of foreign investments, short-term credits and banking capital, besides invisibles receipts and worker remittances.
A potential capital exodus could trigger a sharp fall in the asset prices across the board, including stocks and the rapidly growing real estate markets.
The country’s foreign exchange reserves have increased by about $48 billion in the past one year on the back of strong capital flow, which in turn has been primarily driven by overseas corporate borrowings and the so-called “hot money” coming in form of portfolio equity flows.
While India has emerged as one of the favourite destinations for the portfolio equity flows from FIIs over the past few years, the sharp rise followed by a recent correction in the domestic bourses are raising concerns about large-scale profit booking by FIIs in the near future.
India Inc.’s growing appetite for merger and acquisitions as well as other expansion plans have also fuelled a sharp jump in the overseas borrowings by the domestic companies.
While RBI has been under pressure from corporates to allow greater overseas borrowing, economists fear that the apex bank could end up further tightening the noose if short-term borrowings continue to surge ahead.
If short-term borrowings surge further, RBI could even cut down the maximum limit on overseas corporate borrowings during a year, investment banking giant Morgan Stanley’s India-based economist Chetan Ahya said.
Without prior approval, Indian companies are currently permitted external commercial borrowing of $500 million per year and RBI is unlikely to take forward any move to lift this ceiling in the near future.
Total external commercial borrowings are currently subject to an annual cap of $22 billion. The sharp rise in interest rates over the past few months is also helping in a significant surge in corporate borrowings.
According to Morgan Stanley, the total foreign debt inflows to the country is estimated to have risen to $10.5 billion in March quarter this year, from $4.4 billion in the year-ago period.
In its bid to contain high-flying inflation, RBI has raised its short-term lending rate six times by a total of 150 basis points since January 2006.
Going ahead, RBI would need to choose between a weak to stable currency and hike in interest rates to cool overheating in the domestic market, Ahya said.
However, the central bank is currently more focused on slowing domestic demand growth and reducing inflationary pressure, wherein it would have to allow further appreciation of the rupee against the dollar, he added.
This is despite Indian currency having already reached near its eight-year high with an appreciation of about 9% to below 43 a dollar from the bottom of 47 in July last year.