EM countries become less reliant on short-term foreign capital funding, as evident in improved current account balances and a shift toward longer-term foreign direct investment. For example, in order to reduce its vulnerability to capital flight, India needs to bring its current account to a more sustainable level. To achieve this, the country needs to make its exporting sector more competitive and increasingly encourage long-term foreign direct investment, reducing its reliance on short-term foreign capital funding.
Market Realist – The graph above shows that India’s current account balance as a percentage of its gross domestic product, or GDP. India (EPI) has perennially suffered a current account deficit. As you can see in the chart, India’s current account deficit has been increasing as a percentage of its GDP until last year. In 2013, the Indian government laid restrictions on importing gold (GLD)(IAU) and oil, which make up most of its import bill, to help improve the current account situation and help stabilize the plummeting rupee.
The new government has emphasized increasing the caps on foreign direct investment (or FDI) in an attempt to draw more foreign capital to India, which otherwise depends on short-term foreign capital funding.
But emerging markets (EEM) in general don’t seem to have the same problem. China (FXI), notably, has a current account surplus of $73.4 billion. The next and final part of this series explores the current account status of various emerging markets in detail.