INDIA'S FOREIGN CAPITAL RISK
Mathew Joseph
Forbes, May 26, 2010
India is beginning to bounce back from the global financial crisis. But the IMF has warned that large capital inflows from foreign institutional investors could disrupt this recovery. An analysis of policy options proposed in a recent IMF report reveals, however, that past methods of dealing with FII inflows are inadequate and that market-based capital controls may be the only sufficient response. According to the recent IMF publication the World Economic Outlook, India's GDP growth rate may leap from 5.7% to 8.8% between 2009-2010. This is even higher than the most optimistic projections by the Indian finance ministry.
Less encouraging, however, is the IMF's simultaneously released Global Financial Stability Report (GFSR) in which policy response options are suggested for dealing with capital inflow surges from advanced countries in emerging economies.
While the global economic recovery has been better than anticipated, the IMF identifies two risks: one that affects advanced countries and the other emerging economies. The sovereign risk crisis, which has already erupted in Europe is also threatening other advanced countries with high fiscal deficits and rising debt levels. Emerging economies experiencing a high-speed growth recovery are receiving, once again, large capital inflows from advanced countries that undertook huge liquidity expansion in response to the financial crisis. This has led to a rise in the prices of both goods and assets in emerging economies, besides exerting upward pressure on their exchange rates. The impact on India is particularly significant.
Forbes, May 26, 2010
India is beginning to bounce back from the global financial crisis. But the IMF has warned that large capital inflows from foreign institutional investors could disrupt this recovery. An analysis of policy options proposed in a recent IMF report reveals, however, that past methods of dealing with FII inflows are inadequate and that market-based capital controls may be the only sufficient response. According to the recent IMF publication the World Economic Outlook, India's GDP growth rate may leap from 5.7% to 8.8% between 2009-2010. This is even higher than the most optimistic projections by the Indian finance ministry.
Less encouraging, however, is the IMF's simultaneously released Global Financial Stability Report (GFSR) in which policy response options are suggested for dealing with capital inflow surges from advanced countries in emerging economies.
While the global economic recovery has been better than anticipated, the IMF identifies two risks: one that affects advanced countries and the other emerging economies. The sovereign risk crisis, which has already erupted in Europe is also threatening other advanced countries with high fiscal deficits and rising debt levels. Emerging economies experiencing a high-speed growth recovery are receiving, once again, large capital inflows from advanced countries that undertook huge liquidity expansion in response to the financial crisis. This has led to a rise in the prices of both goods and assets in emerging economies, besides exerting upward pressure on their exchange rates. The impact on India is particularly significant.
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