India'S Impact On Foreign Capital Escapes Continues To Grow

In March 2008 ~10, the stock market in India experienced a continuous decline. The main index SENSEX 30 index fell from 17579 points to 8509 lowest, falling by more than 51%, and the stock index is still lingering around 9000.

The global financial turmoil has made investors reconsider the risk of investment in emerging markets. The massive withdrawal of foreign capital from the India market is an important reason for the decline of India stock market.

Interestingly, in 2007, the India stock market experienced a single day slump. In October 17, 2007, the SENSEX 30 index of India Mumbai plunged 7.9%, triggering a moratorium on trading, and the two major exchanges in the country were forced to stop trading for 1 hours. After the resumption, the index had widen to 9.18%.

The reason why the stock market crashed in 2007 was that the securities regulatory authorities in India suggested limiting the trading of anonymous investors in order to curb excessive hot money flowing into the India stock market. In 2008, however, the continued decline in the stock market in India was due to the pformation of overseas capital flows, which turned into a large number of escapes.

The continuous flow of foreign capital and the diversion of capital flows have not only dealt a heavy blow to the stock market in India, but also brought the test of the global economic crisis to India's economy.

India has largely relied on international capital inflows, which have been halted by the outbreak of the global financial crisis.

"The openness of India's economy is not as deep as China's, so the direct and indirect effects of the global economic downturn on India are not very obvious."

James McCormack, director of the Asia Pacific sovereign rating division of Fitch Ratings, told our reporter that "the extent of its impact on the global economic environment is generally the same as that of China, but these effects are generated through capital inflows rather than commodity trade channels."

India's financial year ends on March 31st each year.

The Central Bank of India indicated that in April 2008 ~11, the balance of payments in India reflected the expansion of the current account deficit, a sharp decrease in net capital inflows and increased volatility.

While foreign direct investment capital inflows are growing, investment in portfolios continues to flow.

Including valuation losses, by January 16, 2009, India's total foreign exchange reserves amounted to $252 billion 200 million, compared with the end of March 2008, a decrease of $57 billion 500 million.

In recent quarters, the continuous outflow of India's international capital and the rapid reduction of overseas borrowing opportunities will not only drag India's economic growth, but also intensify the liquidity tightening of the domestic banking system.

Growth is still slowing down. India's economy also showed strong growth from last July to September. However, as the global economy rapidly entered the downturn, economic growth in October was adjusted.

The outlook for agriculture is still optimistic, but industrial growth has slowed sharply and has spread to various sectors.

In the past few years, the service industry that has been driving the India economy has begun to slow down.

Among them, pportation, communications and trade, hotels and restaurants and other sub sectors are mainly in decline.

The overall demand for India's economy is mainly driven by domestic exports. But in recent years, the importance of exports in India's economic structure has been increasing.

India's commerce minister G.K.Pillai said this week that India's merchandise exports could drop by 22% to 11 billion 500 million US dollars in January this year due to weak global demand.

In the 2008~2009 fiscal year, India's exports were about $170 billion, which could increase by about US $8 billion a year, but the next fiscal year is expected to be reduced to US $160 billion.

Nevertheless, the economic growth rate of India will not decline significantly this year. After all, India's economy is very low in dependence on external goods and services, and the financial leverage coefficient of domestic enterprises and residents is not high.

Standard Chartered Bank forecasts that India's GDP growth will decline to 5% in 2009 from 6.3% in 2008 and reach a minimum of 4.2% in the two quarter, and then the economy will accelerate again, reaching 5.1% in the fourth quarter of this year.

India has not only cut interest rates, but also actively lowered the reserve ratio, injected liquidity into the banking system, and announced a larger financial incentive plan, including tax cuts and infrastructure spending.

But Philip Wyatt, a India economist at Swiss bank, wrote recently that from the perspective of fiscal policy or monetary policy, India's real situation is limited to the government's regulatory space.

In 2007, India's budget deficit accounted for more than 7% of GDP, which is the highest among major Asian countries. This shows that India has virtually no room for substantial fiscal spending and borrowing.

The current budget announced by the financial incentive plan is originally used to subsidize the high oil price in India. Now the price of international crude oil has dropped, so this part of the funds are pferred to other projects.

In terms of monetary policy, India's options are relatively limited.

According to the mid 2008 data, the proportion of loans and other business investments in India and China's commercial banks is about 60%, while the ratio of deposit liabilities to total liabilities is also at 70%~75%.

At first glance, two countries have a lot of room to increase the proportion of loans.

But because of the 25% of the total assets of the India banking system, only a small proportion has been left to the central bank reserve and interbank market. In the past 6 months, half of the funds have been released to the banking system by the Central Bank of India.