Adverse global events may lead to $100-bn portfolio outflows: RBI article

India's forex reserves, at $596 billion in the week ended June 10, equivalent to less than 10 months of imports projected for 2022-23

Indian financial markets, particularly equities, have witnessed hefty foreign investment outflows the past eight months, amid higher US interest rates and a surge in global commodity prices brought on by the Ukraine war.

A weak outlook on the country's GDP growth after the scars inflicted by the Covid-19 pandemic has exacerbated the flight of foreign capital from Indian markets.

A paper authored by Reserve Bank of India staff, however, says that there is (only) a five per cent chance of portfolio outflows from India of the order of 3.2 per cent of GDP or $100.6 billion in a year, in response to a Covid-type contraction in GDP growth.

Other scenarios that could lead to outflows of such a magnitude are: one, a decline in interest rate differentials versus the US of the type seen during the Global Financial Crisis and two, a surge in India’s volatility index of the type seen during the same event.

“In an extreme risk scenario or a black swan event in which there is a combination of all these shocks, there is a 5 per cent chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 per cent of GDP,” the article, co-authored by RBI Deputy Governor Michael Patra, said.

The paper, titled “Capital Flows at Risk: India’s Experience” was written by Patra, Harendra Behera and Silu Muduli and released in the central bank’s June 2022 Bulletin. The views are personal and do not represent those of the RBI, the article said.

The estimates provided in the article assume significance when viewed through the prism of the total stock of portfolio investment worth $288 billion and short-term trade credit worth $110.5 billion in the country at the end of December 2021, the paper read.

“This is indicative of the level of liquid reserves that need to be maintained at all times–in addition to standard metrics of import and debt servicing cover–to quell bouts of instability that volatile capital flows can impose.”

India’s headline foreign exchange reserves stood at $596 billion in the week ended June 10, latest RBI data showed.

The reserves touched an all-time high of $642 billion for the week ended September 3. This was equivalent to 14-15 months of imports for 2021-22. The current level of foreign exchange reserves are equivalent to less than 10 months of imports projected for 2022-23.

So far in 2022, foreign portfolio investors have net sold a massive Rs 2.08 lakh crores worth of Indian equities, data released by the National Securities Depository Ltd showed. FPIs have net sold Rs 14, 618 crore worth of domestic debt over the same period, the data showed.

From October 2021, when the current spate of FII sales started, to March 2022, overseas investors have withdrawn around $20 billion from Indian stocks.

India’s nominal GDP is estimated to grow 19.5 per cent in FY22 to Rs 236.4 trillion, official data released last month showed. GDP growth clocked in at 4.1% in January-March, the slowest in a year.

“In the ultimate analysis, spillovers can be global but the responsibility for macroeconomic and financial stability is national. This focuses attention on the role of international reserve accumulation as the only reliable safety net,” the RBI article read.