Needed: More stable foreign capital

In June, the Reserve Bank of India (RBI) unveiled several initiatives aimed at attracting more foreign capital to the nation. However, doubts arose regarding the extent of inflows achievable through diverse channels, given the ongoing global economic situation. These apprehensions have since been dispelled. By the close of August 31, inflows via the forex swap facility totaled an impressive $136.3 billion, with $63.5 billion arriving in the final ten days.

Out of the cumulative flow, $127 billion transpired through the FCNR(B) route, while the remaining amount was sourced from External Commercial Borrowings and Overseas Foreign Currency Borrowings channels. Consequently, the inflows have considerably surpassed projections. As of August 21, the RBI's forex reserves reached a historic peak of $729 billion, which aids in sustaining external stability.

However, the surge in inflows has posed management challenges for the central bank, as the liquidity surplus has escalated. According to a report from economists at Bank of Baroda, the liquidity surplus began to swell from over Rs 3 lakh crore at the start of August to Rs 6.7 lakh crore by month's end. To address this, the central bank has implemented variable rate reverse repo auctions.

Yet, additional measures may be necessary. These developments have transpired amidst rising inflation and anticipations that the Monetary Policy Committee may need to hike interest rates. A robust first-quarter growth would undoubtedly afford the committee the room and assurance to pursue a tightening policy. The FCNR(B) inflows have provided a reprieve, stemming the rupee's decline.

Nevertheless, this does not resolve the underlying economic concerns plaguing the country. India experiences a current account deficit and has, in recent times, failed to attract ample stable foreign capital. Although foreign portfolio investors have been net equity buyers, and net FDI has gradually increased over the past few months, tighter global financial conditions could impact inflows. The larger issues must be addressed to encourage foreign capital into India.