Policymakers are fretting about currencies and capital controls these days. The World Bank joined the chorus on Tuesday with a report on rising risks in East Asia, shooting an arrow straight at the target. To wit, the surge of capital into emerging markets can make them unstable.
India isn’t explicitly part of this report, but it should take these concerns to heart. One good reason is the nature of the money now coming into India.
We’ve always noted that India should distinguish among different kinds of inflows. Foreign direct investment (FDI) is better than foreign institutional investment (FII)—FDI is long-term and stable. It’s comforting then that, over the last five years, FDI was higher than FII: Something stable was financing India’s external deficit.
This time, it’s different. To date this fiscal year, FII stands near $25 billion. FDI till August hadn’t even crossed $9 billion, shrinking from last year. Coupled with a record high current account deficit, this spells only volatility.