FIIs to pump $25 bn into India: PMEAC

The PM's economic think-tank projected foreign investment in Indian markets...

The Prime Minister’s economic think-tank today projected foreign investment in Indian capital markets to fall to USD 25 billion this fiscal from USD 32 billion in the previous year,even as it expected India to remain a lucrative destination for capital inflows.

“During 2010-11,there will be portfolio capital inflows of USD 25 billion,down from USD 32 billion in the previous fiscal,” the Prime Minister’s Economic Advisory Council Chairman C Rangarajan said while releasing the Economic Outlook 2010-11 report.

Rangarajan attributed the estimated decline in FII inflows to robust inflows in the previous year,after these investors withdrew money from Indian capital markets in large sums due to the global financial crisis.

However,portfolio investment in the next fiscal will again rise to 35 billion dollars,the PMEAC said.

Rangarajan said amid uncertainty in the western world,India remains an attractive destination for capital inflows,with the country’s economic growth expected to be 8.5 per cent this fiscal and 9 per cent in the next financial year.

This will lead to rise in foreign direct investment (FDI) to USD 50 billion this fiscal from USD 31.7 billion in the previous fiscal. This will further increase to USD 55 billion in 2011-12.

FDI is supposed to be longer term investment by foreign investors,while portfolio investment is generally expected to be volatile.

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The higher FDI inflows,along with larger inflows through external commercial borrowings and other debts,would more than make up for the decline in portfolio investment this fiscal.

As such,the total foreign inflows have been pegged at USD 73 billion this fiscal from USD 53.6 billion in 2009-10,which would further increase to USD 91 billion in 2011-12.

The strong capital inflows will ensure that the current account deficit (CAD),which swelled to USD 13 billion in January-March,would be managed comfortably. CAD refers to the deficit in external merchandise and services trade,besides investment income flows.

After covering for current account deficit,foreign capital inflows will add USD 30.9 billion to forex reserves this fiscal from USD 13.4 billion last fiscal. In the next fiscal,forex reserves will go up further by USD 39.8 billion through capital inflows.

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“This (capital flows) would be adequate to finance the large current account deficit in the two years and leave a modest USD 31 and USD 40 billion (2.0 and 2.4 per cent of GDP) to be absorbed in the foreign exchange reserves,” it added.

The panel expects the current account deficit to be 2.7 per cent of the GDP this fiscal.