MUMBAI, July 2: India will face a hard time in attracting foreign capital not only on account of the US sanctions, but also because of various domestic economic constraints such as a high fiscal deficit that threatens an internal debt trap, high cost of financial and monetary transactions and regulatory constraints that cause market imperfections and artificial markets segmentation, according to a research report on Indian markets prepared by Morgan Guaranty Trust Company of New York. There is certainly no fundamental reason for softening of the real interest rate and the decline is more a result of a delayed response of government security yields to rising inflation, it said.On the future course of interest rates, the report said that in a capital-scarce economy like India, there was bound to be an upward pressure on the real rates, particularly when the internal debt situation is far from comfortable. In the coming months, the market interest would distinctly shift towards short maturity assets,resulting in an initial steepening of the yield curve followed by its flattening at higher levels, it said. Yields at the longer end were expected to harden by 50-75 basis points over the next three to six months, it added.
The JP Morgan report said that any signs of improvement in liquidity would be utilised by the Reserve Bank to push through fresh government bond auctions. Later in the year, the RBI is likely to conduct aggressive open market sales of its seemingly endless supply of government stock.
Further, there are indications that the poor offtake of bank credit by the corporates will gradually change in the second half of the year and the financial institutions and banks are likely to be more aggressive borrowers in the domestic markets than in the previous years.
Further, the two notch downgrade by Moody's and widening of spreads on Indian paper in the overseas markets will force these entities to local market funding. All these factors would be aided by the current bearish sentiment towardsthe region that would lead to a considerable slowdown in foreign direct investment and portfolio inflows and collection from RBI may not be sufficient to counter this impact.
At best, one can expect a flat reserves scenario for fiscal 1998-99. While the rupee seems to have stabilised in the near term and is expected to broadly track the other Asian currencies, the research paper said that only internal factors, rather than external ones, could play a significant role in fluctuation of the Indian currency in the future. The report further said that the current bout of Asian economic depression had given an opportunity to India to attract foreign investments. However, it would be difficult to achieve mainly due to the growing risk aversion in the international investment community, thus fuelling the need for further reforms in the Indian system, it said. Highlighting problems that need urgent attention by Indian authorities, the research paper said that the large and fragile coalition government at theCentre sent negative signals to the foreign investors as they noticed lack of political commitment and consensus to go ahead with the reform process.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
