Reserve Bank of India (RBI) Governor Shaktikanta Das exuded confidence in the country’s resilience to external risks and its capability to attract inflows as foreign investors hunt for lucrative returns amid rate cuts by central banks.
Das said that India is among one of the most attractive destinations for foreign portfolio investors (FPIs) and the rate cut by the US Federal Reserve should lead to higher inflows into the country.
“From the Indian point of view, any cut in interest rates should mean greater flows into the emerging markets. India is among one of the most attractive destinations for FPIs and others. So, I think, this should lead to more inflow of funds into India by way of FPI as well as to some extent, by way of Foreign Direct Investment,” Das said at India Economic Forum held on September 19.
On September 18, the US central bank cut interest rates by 25 basis points citing implications of global developments for the economic outlook as well as muted inflation pressures.
“This round of cut was by and large expected by the markets. In fact the markets are bracing for more number of cuts but again, the coming months will tell what will be the stance of the United States,” said Das.
While the inflows are welcome, Das added that as a regulator, the RBI will also simultaneously focus on the possible spillover effects at a later date. The RBI also keep watch over the possible adverse effects during the reverse flow of these funds, he said.
Overall, the outlook for India’s external sector is one of cautious optimism, Das said, adding that there are a number of downside risks. “Among them, deepening of the global slowdown and escalation of trade and geopolitical tensions appear to be the most significant. Volatile international crude prices also continue to pose potential risks to the viability of the current account balance through trade and remittances channels,” he said.
India’s external sector has exhibited resilience and viability despite a hostile global environment, Das said. “The current account deficit has averaged 1.4 percent of GDP over the last 5 years and remains comfortably financed in spite of global spillovers imparting risk-on-risk-off volatility to portfolio flows,” he added.
Das highlighted the need to search for new export markets and new niches to take advantage of changing dynamics of global value chains. He said that Indian IT companies need to accelerate market diversification and invest in new skills and technologies to hone their comparative advantage.
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