Capital flows fueling stock boom: FM

Govt said that huge capital inflows are fueling equity prices,but could spell danger for India.

Attributing the surge in capital flows to strong fundamentals,the government said that they are fueling equity prices to new highs in stock markets,putting pressure on rupee and could lead to 8220;overheating8221; of economy.

8220;The main implication of such large capital flows to India has been buoyancy in stock markets and appreciation of rupee vis-a-vis dollar,8221; said the Mid-Year Analysis of economy tabled by Finance Minister Pranab Mukherjee in Parliament on Tuesday.

The surge in capital flows 8220;raises the question whether the inflows are in excess of domestic absorptive capacity,which could lead to overheating of the economy8221;. Overheating implies rise in prices because of excessive demand,it added.

Foreign Institutional Investment FII increased sharply to USD 27.5 billion during April 15-October 2010 from USD 18.4 billion in the corresponding period last year. FII money goes into stock markets.

Total capital inflows during April-September 2010 works out to be USD 37.4 billion,the Analysis said,adding 8220;the surge is reflected in the appreciating rupee and growing stock market,mainly because most of the capital in from FIIs and flows into stock market.8221;

Compared to major world indices,it added,Indian stock exchanges witnessed remarkable growth this financial year. BSE Sensex surged by over 14 per cent during April-October,while NSE Niffty recorded a gain of 15 per cent.

As regards the impact of capital flows on rupee,the Analysis said,8221;it has not caused a sharp appreciation of the rupee 8230; It reflects the growing strength of the economy and its capacity to absorb investment.8221;

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However,in the backdrop of currency war and competitive devaluation of currencies by several important countries,it said,8221;appreciating rupee can have adverse impact on the earnings of exporters and make exports less competitive in international market.8221;

Rupee,during March 2009 and March 2010,appreciated by 12.6 per cent against dollar,mainly on account of weakening of the greenback in international market.

The surge in capital flows,according to the Analysis,has been on account of national and international factors.

8220;Strong economic fundamentals i.e. a high growth rate,macroeconomic stability and a stable policy regime,are the domestic factor attracting foreign capital flows to India.

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8220;Easy money policy in terms of ultra low interest rates and successive rounds of quantitative easing is most advanced economies is also driving capital in search of higher yields to emerging economies like India8221;,it added.