News: Don't fear the bear, bank on India

(IBN 08/06/2006) Washington DC - There is good news for the Indian economy as a recent World Bank report says that investors will continue to show strong interest in developing economies.

The sharp rise in capital inflows to developing countries last year came despite high oil prices, rising global interest rates and growing global payments imbalances.

Net private capital flows to developing countries reached a record high of $491 billion in 2005, up from $397 billion in 2004 according to the World Bank's Global Development Report.

For South Asia, the figure rose nearly three-fold, from $8 billion in 2003 to almost $24 billion in 2005 and most of the money poured into the strong equities market.

"One of the things we see in south Asia in general is that increase in flow towards that region has been in equities as opposed to foreign direct investment or bond-lending," senior economist, World Bank, Andrew Burns says.

"That's obviously a reflection peoples interest in stock market in the new dynamic companies that investors see in India," he adds.

However, recently that interest has turned into nervousness following the recent crash of most of the Asian stock markets including India and Japan.

Experts opine that it has put the brakes on the frenzied inflows.

"This is a cyclical market and the flows go up and they may go down. What we've observed over the last 6-7 weeks is a clear pause in flows towards developing countries but also in high income countries, so we've seen the stock market in US fall," Burns says.

Adding to the market nosedive, the impact of rising global oil prices has increased India's deficit by 0.7 per cent of the Gross Domestic Product (GDP) between 2002 and 2005 according to the World Bank.

The latest oil price hike could help ease that burden but would lead to an increase in inflationary pressures in the country this year.

However, despite these challenges, experts forecast continued growth in private investments in India, especially in the IT and service sectors.