Bad global affairs can lead to $100 bn in capital outflows from India: RBI report

Over the last eight months, Indian financial markets, particularly equities, have seen significant foreign investment outflows due to higher US interest rates and a surge in global commodity prices caused by the Ukraine war.

A bleak outlook for the country’s GDP growth as a result of the Covid-19 pandemic has exacerbated foreign capital flight from Indian markets.

According to a paper authored by members of the Reserve Bank of India (RBI), there is (only) a 5% chance of portfolio outflows from India in the order of 3.2% of GDP or $100.6 billion per year in response to a Covid-type contraction in GDP growth.

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Other scenarios that could result in such large outflows include: one, a decline in interest rate differentials versus the US similar to that seen during the Global Financial Crisis, and two, a surge in India’s volatility index similar to that seen during the same event.

“In an extreme risk scenario or a black swan event in which there is a combination of all these shocks, there is a 5 per cent chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 per cent of GDP,” the article, co-authored by RBI Deputy Governor Michael Patra, said.

The paper, titled “Capital Flows at Risk: India’s Experience” was written by Patra, Harendra Behera and Silu Muduli and released in the central bank’s June 2022 Bulletin. The views are personal and do not represent those of the RBI, the article said.

The estimates in the article take on significance when viewed through the lens of the country’s total stock of portfolio investment worth $288 billion and short-term trade credit worth $110.5 billion at the end of December 2021, according to the paper.

“This is indicative of the level of liquid reserves that need to be maintained at all times–in addition to standard metrics of import and debt servicing cover–to quell bouts of instability that volatile capital flows can impose,” the paper further said.

According to the latest RBI data, India’s headline foreign exchange reserves were $596 billion in the week ending June 10.

For the week ending September 3, reserves reached an all-time high of $642 billion. This equated to 14-15 months of imports in 2021-22. The current level of foreign exchange reserves is less than ten months’ worth of imports projected for 2022-23.

According to data released by the National Securities Depository Ltd, foreign portfolio investors have net sold a massive Rs 2.08 lakh crores worth of Indian equities so far in 2022. According to the data, FPIs net sold Rs 14, 618 crore of domestic debt during the same period.

From October 2021, when the current wave of FII sales began, to March 2022, foreign investors withdrew approximately $20 billion from Indian stocks.

According to official data released last month, India’s nominal GDP is expected to grow 19.5 percent in FY22 to Rs 236.4 trillion. GDP growth was 4.1 percent in January-March, the slowest rate in a year.

“In the ultimate analysis, spillovers can be global but the responsibility for macroeconomic and financial stability is national. This focuses attention on the role of international reserve accumulation as the only reliable safety net,” the RBI article read.

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