Are too much foreign flows bad?
Sometime back, we saw that current account surplus position became headache for policymakers because of too much dollar inflows. On one hand, India is a capital starved country and hence we chase after money through FDI. On the other hand, large inflows create problem for Central Bank which faces impossible trinity which states that policy makers can choose any two, but not all macroeconomic objectives - foreign capital mobility, fixed exchange rate and inflation management. Cut interest rates too far and risk scaring off foreign capital. Raise borrowing costs too much to fight inflation and funds rush in, sending the currency higher and strangling exports. The developed world central bankers are likely to create more than $10 trillion of new money. Most of it is deployed in the Government bond markets earning next to nothing. Some of this liquidity will find its way into Indian assets as well. Let's suppose RBI fixes interest rate independently at 8% because India's i...