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Capital Account of IndiaWhat is capital account?

Capital account records all capital inflows and outflows of a country and forms part

balance of payment (BoP).

It tracks the capital movement for investments and loans into and out of a country.

When there is capital account surplus it means a country is receiving more capi

inflows. This results in increase in overall increase in BoP, thereby resulting increase

countrys foreign exchange reserves*.

Current account deficit is financed by capital account surplus*.

Chart below shows annual capital account and current account and overall balance

payment trend in absolute term.

Source: RBI

From the above chart, we can see that India has always had a capital account surplu

Capital account has always exceeded current account and been able to finance curreaccount deficit except in the years 2009 & 2012.

Although in the years 2009 & 2012, there has been capital account surplus, but it h

not been enough to fund the current account deficit resulting in negative BoP.

-100

-75

-50

-25

0

25

50

75

100

125

150

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

USDBn

Balance of Payment

Capital Acount

Current A/c

Balance of Payment

* 2013 is ti l l December 2012

*Refer to ReWISE on Current account deficit and Rupee Appreciation & Depreciation

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Components of Capital account

Capital inflows and outflows are classified into foreign investments, loans, banking

capital, rupee debt service and other capital.

Foreign investment is divided into two components foreign direct investments (FDI)

and foreign portfolio investments. FDI refers to foreign investment made in and by India through mergers &

acquisitions or setting up new operations while foreign portfolio investments

include FII investments in Indian capital market.

Loans are further classified into external assistance, commercial borrowings (medium

and long term) and short term loan.

External assistance refers to loans given to India from foreign government and

loans given by India to other foreign government.

Commercial borrowings include all medium and long term loans from India

through EXIM bank to other countries and loans to Indian companies through

FCCB, floating rate notes etc.

Short term loans include loans up to 1 year to India for imports directly by

overseas supplier. Its components include suppliers credit up to 180 days,

buyers credit and suppliers credit greater than 180 days.

Banking Capital includes foreign assets and liabilities of commercial banks like NRI

deposits, foreign currency holdings etc and movement in balances of foreign central

banks and international institutions like Asian Development bank, International Bank for

Reconstruction and Development, International Development Association etc.

Rupee debt service includes interest payments and principal repayments on account

civilian and non civilian debt in respect of Rupee Payment Area.

Other capital includes all other capital flows not included above categories like delayed

export receipts, quota payments to IMF, Indias subscriptions to international institutionsetc.

Table below shows net break up of capital account over the years.

Source: RBI

We can see that the capital flows peaked in 2008 to `106.8bn and fell to `6.8bn in 2009

during the crisis.

India capital flow composition has changed over period of time.

Column1 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13*

CapitalAcount (a+b+c+d+e) 8.8 8.6 10.8 16.7 28.0 25.5 45.2 106.6 6.8 53.4 61.3 67.8 71.6

Foreign investment (a) 5.9 6.7 4.2 13.7 13.0 15.5 14.8 43.3 5.8 51.2 38.6 39.2 29.9

FDI 3.3 4.7 3.2 2.4 3.7 3.0 7.7 15.9 19.8 18.8 8.3 22.1 15.3

Portfolio Invesment 2.6 2.0 0.9 11.4 9.3 12.5 7.1 27.4 -14.0 32.4 30.3 17.2 14.6

Loans (b) 5.3 -1.3 -3.9 -4.4 10.9 7.9 24.5 40.7 8.3 13.3 28.4 19.3 22.1

External Assistance 0.4 1.1 -3.1 -2.9 1.9 1.7 1.8 2.1 2.4 2.9 4.9 2.3 1.8

Commercial borrowings 4.3 -1.6 -1.7 -2.9 5.2 2.5 16.1 22.6 7.9 2.8 12.5 10.3 4.5

Short term 0.6 -0.8 1.0 1.4 3.8 3.7 6.6 15.9 -2.0 7.6 11.0 6.7 15.7

Banking capital (c ) -2.0 2.9 10.4 6.0 3.9 1.4 1.9 11.8 -3.2 2.1 5.0 16.2 20.2

Rupee debt service (d) -0.6 -0.5 -0.5 -0.4 -0.4 -0.6 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 0.0

Other capital (e) 0.3 0.8 0.6 1.7 0.7 1.2 4.2 11.0 -4.0 -13.0 -10.6 -6.9 -0.5

in USD( bn), * FY13 till December 2012

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Foreign investment component contribution to capital account surplus has increased

over years as against loans component contribution except for year 2009.

2009 due to portfolio investment outflows, overall foreign investment flows declined.

Foreign investment flows comprised around 60% of capital account in 2012 while loans

comprised around 30% of capital account.

Portfolio investment flows have been major contributor to overall foreign investments

although it has decreased off late. From around 80% contribution to foreign investment

flows in 2006 it has fallen to 44% in 2012.

Chart below shows sectors attracting highest FDI equity inflows as % of total FDI equity

inflows from April 2000 till March 2013 (in terms of USD).

Source: Department of Industrial Policy and Promotion, RBI From above chart, it can be seen service sector has attracted highest FDI inflows since

April 2000.

The above 10 sectors have attracted around 70% of FDI inflows till March 2013.

Services sector*19%

Construction development11%

Telecommunications7%

Computersoftware &Hardware

6%

Drugs &

Pharmaceuticals5%

Chemicals (other thanfertilizers)

5%

Automobileindustry

4%

Power4%

Metallurgical industries 4%

Hotel &

Tourism3%

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

*Services sector includ es Financial, Banking , Insurance, Non-Financial /

Busin ess, Outsourc ing, R&D, Courier, Tech. Testing and Analysis

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Chart below shows FII flows in equity and debt from financial year 1993 to 2013.

Source: SEBI

From above chart, its seen that FII flows to debt market have only being increased in

recent years.

Majority of FII flows are into equity market.

Except for 1999 and 2009, India has had positive FII equity inflows.

For any further clarification contact mahvash.ariyanfar@idfc.com

-1,000

-500

0

500

1,000

1,500

2,000

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FII Flows

Debt

Equity