Capital Inflows to the Indian Economy:Causes and Consequences

India has relied on capital inflows for financing current account deficits and for growth-promotion. The composition of capital inflows has undergone a major change during the period of the study. External assistance which was a major component of capital inflows has been replaced by external commercial borrowings, deposits of the non-resident Indians and by other forms of capital. This change implies that capital will come to India on market-dictated terms rather than as soft loans. Recent inflows of capital to India can be attributed both to the internal as well as external factors. Indicators of monetary, fiscal and external sectors did give signals of credibility to the foreigners. Declining interest rates and recessionary conditions in the industrial countries can partly explain the capital inflows to the developing countries as also to India. The empirical evidence suggests that volatility in current account can explain the fluctuations in capital inflows and that fluctuations in the components of capital flows (except external assistance) have been, by and large, higher than the fluctuations in total capital flows. implying thereby. substitution between the various components of capital inflows. The Reserve Bank of India has resorted to both intervention in foreign exchange market so as to avoid appreciation of the rupee needed for promotion of exports and also to sterilisation for the sake of monitoring the inflationary impact of capital inflows. This can be regarded as one of the reasons for a substantial jump in increase in debt-stock of the central government. Given the hardening of interest rates abroad, revival of growth in industrial countries, political uncertainty and weak fiscal management in the Indian economy. we should realise that this task is not an easy one. Even if we are able to invite capital flows which may come due to external reasons alone, the monetary policy will have to grapple with the problem of capital flows so as to retain international competitiveness of India's exports and to contain inflation.