Foreign capital may remain muted for a little longer

Foreign capital may remain muted for a little longer

New Delhi: Foreign capital supporting India’s investment plans may remain muted for a while longer till the global financial system adequately addresses structural and supervisory issues and the process of recapitalizing beleaguered financial institutions is completed, according to the finance ministry’s status report of 2009 on external debt.

“The positive developments in the international capital markets point to a reversal of the downward trend in capital flows, which had set in around mid-September 2008, though downside risks still prevail," the ministry said in its report released on Wednesday.

The fall of US investment bank Lehman Brothers Holdings Inc. last September triggered a global credit squeeze, but prompted governments to step in with several measures to ease liquidity.

The outlook mirrors the worry articulated by Montek Singh Ahluwalia, deputy chairman of the Planning Commission and a member of India’s negotiating team at meetings of the Group of Twenty (G-20) nations.

Participating in a debate in New Delhi on 14 September on international financial architecture, Ahluwalia said the real concern now was if the international financial system would support the rapidly expanding need for credit.

According to the ministry’s report, the impact of the global financial crisis showed up in the form of a decline in capital flows, including debt flows into India in 2008-09.

During the fiscal year, net external commercial borrowings was $8.2 billion (Rs39,300 crore), 64% lower than the overseas debt raised by Indian companies in the preceding financial year.

To counter the impact of the slowdown, India resorted to a policy of loosening regulations governing raising of overseas debt. “These measures have been possible due to comfortable external debt position of the country," the report said.

India’s external debt was $229.9 billion at end-March, higher by $5.3 over a year ago.