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-Rajeev Kumar (Editor-in-chief)

Thursday, November 26, 2020

Make good use of capital inflows (The Economic Times)

The government’s move to add to the equity capital of National Investment and Infrastructure Fund is welcome, as it would allow that institution to mobilise additional capital with which to implement new projects.


As the Biden transition in the US moves ahead smoothly and the US economy’s growth trajectory reveals itself to be less disastrous than feared, investor confidence returns and fund flow resumes in earnest to emerging markets such as India. The additional liquidity created to combat the Covid-slump will add to the volume of these flows.


For India to absorb these funds into the real economy, instead of suffering harmful asset price inflation, a slew of projects must be implemented that would add to the nation’s infrastructure, spending some of the foreign exchange inflows on imports.




RBI has been compelled to keep buying dollars, as cross-border portfolio flows and direct investment accumulate. India’s foreign exchange reserves stood at $572.7 billion on November 13. The reserves have gone up by over $4 billion in just one week, $95 billion since end-March, and $124.5 billion over the year.


This year, India could end up with a current account surplus, further adding to the pile-up of dollars. The export-weighted real effective exchange rate of the rupee has been creeping up, despite RBI’s valiant efforts to prevent export-corrosive appreciation of the rupee, by purchasing dollars as they flow in.


Dollars need to be spent on raw materials, capital equipment and intermediaries that add to India’s productive capacity, raise output, productivity and exports. Direct investment inflows go generally into fresh capacity or brownfield expansion, unless it is for takeover of a domestic company with no immediate plans for expansion.


Portfolio inflows bring in additional liquidity, putting upward pressure on interest rates as RBI sterilises the rupees released while purchasing dollars. The additional liquidity must find its way into new capital formation, by means of accelerated project implementation.

Courtesy - The Economic Times.

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Help Sampadkiya Team in maintaining this website

इस वेबसाइट को जारी रखने में यथायोग्य मदद करें -

-Rajeev Kumar (Editor-in-chief, Sampadkiya.com)

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