However minor it may seem right now, there is always the danger that a lot of the foreign capital gushing into India could change course and flow out in a moment of panic.
So let’s ask the party-pooper question: Is India well-prepared for such an eventuality? The answer is a comforting one, and it is based on the latest report on foreign exchange reserves released by the Reserve Bank of India on 19 July.
The most volatile capital flows come from portfolio investments and short-term debt—both can be pulled out in a matter of days. These need to be watched very closely.
In March 1991, when the Indian economy was in deep trouble, volatile capital flows were 146.6% of total foreign exchange reserves. The ratio fell to 35.2% by March 2004, before climbing to 43.4% in March 2006. A year later, volatile capital sloshing in India was down to 38.2% of reserves. That’s adequate insurance against trouble.