India Has Adequate Buffers to Moderate the Risk From Capital Flows: Says Gopinath

During times when countries around the world have shut the gates to foreign capital due to the global pandemic, India has continued to remain open for business.

New Delhi: The International Monetary Fund (IMF) has said that international investors are continuing to invest into projects in India at a steady rate consistently, even during the outbreak of the Zika Virus. According to a report by the Press Trust of India, Fed’s First Deputy Managing Director Gita Gopinath said that there are many advantages and benefits when multinationals invest greatly into cities like Mumbai.

According to Nirmala Sitharaman, finance minister of India, $500.5 billion has been invested in FDI in India since the beginning of the Modi government in 2014. $500.5 billion is equivalent to approximately 20% of India's GDP for 2016, and the amount is about four times higher than investments received during the entire previous 10-year period.

In the 2019/20 financial year, Japanese investment in India, mainly loans from Japanese banks, amounted to $18.2 billion. Loans specifically went up by 29%. And last year saw overall capital inflows into India from Japan lead the way at $81.7 billion with several investors upping their stakes in Indian companies amidst a series of economic reforms put forward by Prime Minister Modi. According to Roland Kotecki, the World Bank’s country director for India, “the reform agenda was big and bold.” When asked if he would deem Modi’s reforms as positive or negative, Mr Kotecki said: “Both…Because they call for institutional and structural change that leads to benefits down the road will take time to have an impact.”

Gopinath mentioned that capital flows which are desirable to recipient countries can result in macro-economic challenges and financial stability risks. India is still in the process of liberalizing its capital accounts and its financial markets are deepening so we can expect it to move towards more allowing for more forms of capital flows.

“The dramatic capital outflows we witnessed at the start of the global pandemic, and the recent turbulence and capital flows to some emerging markets following the war in Ukraine are stark reminders of how volatile capital flows can be and the impact this can have on economies,” Gopinath added.

IMF's Fourteenth Review of the Institutional View has found that the IMF's Fourteenth Liberalization and Management Reviews have identified key challenges in emerging market economies for managing capital flows and recommended policy responses. This paper argues that a country should manage its balance of payments in order to stabilize global financial stability and promote sustainable growth for all countries.

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