Will the market rout trigger a balance of payments crisis?

Foreign portfolio flows out of India’s markets have surged over the past month to more than double the peak during the “Taper Tantrum” in 2013, which pushed India to the brink of a balance of payments crisis. Higher foreign exchange reserves and a smaller current account deficit that is comfortably financed by relatively stable inflows of FDI mean that the external position looks far more secure now. But an extended period of risk aversion could force the RBI to deploy its FX reserves, while the sudden halt in global economic activity could threaten even FDI inflows. This would intensify concerns over the external position and potentially prolong the domestic slowdown.