Continuous sell off by foreign investors may put India's Balance of Payment under pressure: Report
Nov 12, 2024
New Delhi [India], November 12 : If the ongoing sell off by the foreign investors gets coupled with a sharp surge in the crude price it could put India Balance of Payments (BoP) under significant pressure, highlighted a report by DSP Asset Managers.
The report noted that Foreign flows, especially from Foreign Institutional Investors (FIIs) in the equity market, are not just drivers of stock prices but essential to maintaining macroeconomic stability in India.
It said "In the event of a sharp increase in oil prices (causes unknown) combined with large-scale FII sell-offs, India's Balance of Payments could deteriorate rapidly".
The report also highlighted that historically, India has struggled with a high dependency on imported crude oil, a crucial input that deeply impacts the nation's external balance.
It added that every time crude oil prices surge past USD 100 per barrel, India's merchandise trade deficit grows substantially, putting pressure on the country's economic resilience.
However, over the last decade, rising net flows from services exports and remittances have helped offset the impact of high oil prices on India's BoP. Even with crude oil at USD 100 per barrel, these inflows have helped keep India's merchandise deficit in check.
It said "In years when India faces an oil shock, foreign inflows come to its aid".
Yet, this buffer does not make India immune to external shocks. When oil prices spike unexpectedly, the BoP position becomes fragile, and India has often relied on foreign capital inflows to stabilize its finances.
During the 2013 crisis, for instance, the Reserve Bank of India (RBI) launched the USD 34 billion FCNR deposit scheme to attract dollar inflows, providing a much-needed cushion.
Similarly, in financial years 2013, 2018, and 2019, India raised substantial foreign loans to manage deficits.
So the report noted that if capital inflows were to fall short, a currency crisis could emerge, compelling the RBI to intervene.
It said "when India's financial and capital accounts are unable to cover the current account deficit, a currency threat looms, which the RBI must manage".
Therefore, ensuring steady foreign flows remains a priority for India's economic stability, especially in times of volatile oil prices and uncertain global capital flows.
