Impact of the West Asia Crisis on the Indian Economy
The West Asia crisis has shifted focus to inflation pressures and growth impacts due to increased fuel prices. An important but underemphasized metric is the flow of funds, which includes bank credit, NBFCs, debt and equity markets, and foreign sources.
Flow of Funds
- In FY26, the total flow of funds was ₹47 trillion compared to ₹36.6 trillion in FY25.
- The majority of this increase came from bank credit, constituting 62% of the share.
- Non-banking sources' contribution reduced to 38%, a shift from previous years where both sectors had nearly equal shares.
Foreign Inflows
- Foreign inflows have stagnated at an 11% share, down from nearly 30% in FY22.
- This stagnation is due to tighter global financial conditions and increased domestic bond yields.
Factors Affecting Capital Inflows
- Rising UST yields, reflecting worsening US fiscal metrics, have contributed to a slowdown in capital inflows.
- India's capital account surplus decreased from 2.6% of GDP in FY24 to an estimated 0.1% in FY26.
- Domestically, higher G-sec yields have increased corporate bond yields, reducing issuances and increasing reliance on bank credit.
Domestic Savings and Investment
- Gross domestic savings are expected to reduce to 30% of GDP in FY27 from 34% in FY26.
- This reduction is due to a wider fiscal deficit and lower household and corporate savings amid rising fuel costs.
- Attracting foreign savings is critical to offset slower domestic savings.
Policy Suggestions
- To attract capital inflows, the RBI could consider schemes like FCNR(B) or external commercial borrowings.
- Subsidising hedging costs may be necessary to make such schemes viable.
- A rate hike is not currently needed as inflation is within the target band of 2% to 6%.
The ongoing economic conditions highlight the importance for India to wisely manage both domestic and foreign financial resources in light of global challenges.
