The Prime Minister’s economic advisory council (PMEAC) said it was not yet time to impose curbs on foreign capital inflows as the Indian economy has the capacity to absorb $70 billion in a year.
“I think the time for acting against capital flows has not come at the present moment, but we need to watch the capital inflows,” PMEAC chairman C Rangarajan said here.
India is the only major emerging country to have avoided restrictions on foreign capital inflows so far. More dollars are expected to arrive in coming months as the US Federal Reserve announced plans to buy government bonds worth $600 billion, in an attempt to infuse liquidity and spur demand.
India’s bond yields at about 8.2% are significantly higher than the 2.5% in the US.
The current account deficit in India is expected to be around 3% of the gross domestic product (GDP) — the highest in nearly two decades. “This will mean something like $45-50 billion. We can also accommodate comfortably up to $20 billion as additional reserves, so capital inflows up to $70 billion should not pose any problem,” Rangarajan said.
The current account deficit is a measure of the excess of imports of goods and services over exports and represents the shortfall of domestic savings over investment, which is offset by capital inflows.