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Capital flows in India: An overview - Views on News from Equitymaster
 
 
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  • Dec 31, 2008

    Capital flows in India: An overview

    Capital flows are considered as growth drivers for the economy of any country. But do we know what capital flows are? How did they evolve in India? In this article we will discuss about the same.

    What are capital flows?
    Capital flows as per economics are defined as cross border movements in ownership of assets, a large part of which involves financial instruments such as ownership of company shares, bank loans, government securities recorded in the capital account of country’s balance of payment.

    Capital flows can be classified into two types viz. capital inflow and capital outflow.

    Capital inflow: It refers to the acquisition of domestic assets by non-residents (plus grants). Sales of domestic assets are defined as a negative capital inflow. Thus the term net capital inflow denotes acquisition minus sales of domestic assets by Non-residents. For example Tata Tele’s stake sale to Japanese major DoCoMo.

    Capital outflow: It refers to the acquisition of foreign assets by residents. Sales of foreign assets are defined as a negative capital outflow. Thus the term net capital outflow denotes acquisitions minus sales of foreign assets by residents. For example Tata Steel’s acquisition of Corus.

    Capital flows have a significant impact on the economy of a country. It influences the forex rate of the domestic currency and also domestic interest rates.

    History of ev

    Capital flows are considered as growth drivers for the economy of any country. But do we know what capital flows are? How did they evolve in India? In this article we will discuss about the same.

    What are capital flows?
    Capital flows as per economics are defined as cross border movements in ownership of assets, a large part of which involves financial instruments such as ownership of company shares, bank loans, government securities recorded in the capital account of country's balance of payment.

    Capital flows can be classified into two types viz. capital inflow and capital outflow.

    Capital inflow: It refers to the acquisition of domestic assets by non-residents (plus grants). Sales of domestic assets are defined as a negative capital inflow. Thus the term net capital inflow denotes acquisition minus sales of domestic assets by Non-residents. For example Tata Tele's stake sale to Japanese major DoCoMo.

    Capital outflow: It refers to the acquisition of foreign assets by residents. Sales of foreign assets are defined as a negative capital outflow. Thus the term net capital outflow denotes acquisitions minus sales of foreign assets by residents. For example Tata Steel's acquisition of Corus.

    Capital flows have a significant impact on the economy of a country. It influences the forex rate of the domestic currency and also domestic interest rates.

    History of evolution of capital flows in India: The capital flows to India have undergone a compositional shift from mainly official and private debt flows to non debt creating flows in the post reform period.

    India s approach towards capital flow can be divided into three main phases viz:

    1. Phase I between 1947 to 1980
    2. Phase II between 1980 to 1990
    3. Phase III after 1991 onwards (also called post reform period).

    Phase I: This phase was started at the time of Independence and extended up to early 1980 wherein India's dependence on external flows was mainly restricted to multilateral and bilateral concessional finance.

    Phase II: This phase began in early 1980s mainly on account of widened current account deficit due to the traditional way of external financing, thus India added recourse to external commercial loans including short term borrowings and deposits from NRIs.

    Phase III: The measures in second phase led to increased short term debt in total external debt and thus caused a balance of payment crisis in 1991. This phase embarked initiation of reforms process and thus led to market determined exchange rates regime, removal of trade restrictions, move towards current account convertibility and gradual opening up of capital account.

    In the next article we will discuss the trends, magnitude and composition of capital flows in India and its impact on the economy.

    * This write up has been influenced by a paper presented by Deputy Governor of RBI, Mr. Rakesh Mohan. olution of capital flows in India: The capital flows to India have undergone a compositional shift from mainly official and private debt flows to non debt creating flows in the post reform period.

    India’s approach towards capital flow can be divided into three main phases viz:

    1. Phase I between 1947 to 1980
    2. Phase II between 1980 to 1990
    3. Phase III after 1991 onwards (also called post reform period).

    Phase I: This phase was started at the time of Independence and extended up to early 1980 wherein India’s dependence on external flows was mainly restricted to multilateral and bilateral concessional finance.

    Phase II: This phase began in early 1980s mainly on account of widened current account deficit due to the traditional way of external financing, thus India added recourse to external commercial loans including short term borrowings and deposits from NRIs.

    Phase III: The measures in second phase led to increased short term debt in total external debt and thus caused a balance of payment crisis in 1991. This phase embarked initiation of reforms process and thus led to market determined exchange rates regime, removal of trade restrictions, move towards current account convertibility and gradual opening up of capital account.

    In the next article we will discuss the trends, magnitude and composition of capital flows in India and its impact on the economy.

    * This write up has been influenced by a paper presented by Deputy Governor of RBI, Mr. Rakesh Mohan.

     

     

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    1 Responses to "Capital flows in India: An overview"

    Tom Jacob

    Feb 16, 2017

    9526545642 good

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