India can take inflows up to $150 bn without capital controls: RBI, govt.

Policymakers are now more optimistic of the economy’s capacity to absorb capital inflows without having to resort to artificial controls. The government, together with the Reserve Bank of India (RBI), have discussed the matter and have come to an understanding that given the import-intensity of the fast-growing economy, the tolerable level of net capital inflows could be informally set at $150 billion, up from the earlier figure of around $110 billion.

The Centre and RBI reckon that due to strong domestic growth and limited export growth, more external capital would be needed to finance the current account deficit, (CAD) which is estimated at close to 3% of GDP for 2010-11.

CAD, the difference between export and imports, plus remittances and net invisible, is financed through surplus capital account (or net capital inflows), which include foreign direct investment, portfolio investment, banking capital and external loans. The country’s absorption capacity, as reflected by CAD, has gone up more than four times between 2007-08 and 2009-10, according to RBI data. During this period, CAD had increased from 1% of GDP ($9 billion) to 2.9% ($40 billion). This gives authorities the leeway to tolerate higher capital inflows.

Source : indianexpress.com