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: Net capital flows into India were positive and strong in January-March 2008. In contrast to popular perception, this was not on account of high portfolio flows into India. Indeed, the data shows that this was a time when there were portfolio outflows from India.

Balance of Payments data for January to April 2008, the fourth quarter of 2007-08, released recently by the RBI shows that capital inflows fell when compared to the quarter before that by $6 billion. Capital inflows were still large in comparison with previous years.

One striking element about BOP data for the first quarter is the data on portfolio investment. The quarter saw an outflow of FII flows. In the previous quarter, as seen in the accompanying table, there was a net capital inflow of $14.5 billion on account of portfolio flows into India. Between January to March this number turned negative. There was an outflow of $3.76 billion on this account. While the reasons for an outflow of equity flows may be many, and may be caused by global factors and developments in the credit market, it is significant that capital flows continued to be positive and strong in a quarter when there were net portfolio flows out of India. This goes against the common perception that portfolio flows constitute the bulk of capital flows into India.

FDI into India went up, but then so did outbound FDI by Indian companies. As a result of the developments on direct and portfolio investment, net foreign investment into India fell sharply from $18.4 billion to $2.6 billion from the third to the fourth quarter.

The biggest component of capital flows was on account of loans which remained roughly the same at $11.5 to 12 billion in each of the quarters. The government’s policy on External Commercial Borrowings (ECBs), which put restrictions on ECBs meant that there was a slowdown in inflows on account of such loans. But if ECBs came down by about $1.5 billion, an equal additional amount came in through the short loan window. This meant that despite the restrictions, total net inflows on account of loans did not fall.