Increasing dependence on foreign flows with weak fundamental could raise financial stability risks. Analyse (200 Words)
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· The idea behind the proposal mentioned in the 2020-21 Budget is to further open up the sovereign debt market for foreign investors and make sure that Indian government bonds figure in global indices.
· Inclusion in global indices would result in a stable flow of foreign savings. Some of the large and long-term investors such as pension funds invest on the basis of the composition of such indices.
· According to the latest data, net household financial savings dropped to an eight-year low of 6.5 per cent of gross domestic product (GDP) in 2018-19.
· The flow of foreign savings would ease some pressure in the debt market and help encourage real investments. The government is also increasing the limit for foreign investment in the corporate debt market.
· In the given context, it is likely that India will not immediately get included in bond indices and would need to offer a significant stock of bonds to foreign investors before being considered for addition in indices.
· Inclusion in such indices often depends on availability and liquidity. But large foreign inflows will put upward pressure on the rupee, which could affect India’s external competitiveness and increase the current account deficit.
· To avoid currency appreciation, the Reserve Bank of India will need to actively manage the currency, which could affect its monetary policy objectives.
· Thus, while the idea of inclusion in global bond indices and accessing global savings has merits at a theoretical level, policymakers should not ignore the fundamental weaknesses of the Indian economy.
HB 5 years
please review
IAS Parliament 5 years
Try to explain the flow chart and the points listed out. Keep Writing.
