India's FDI inflow momentum may slow down this year and exports too may not revive with "full gusto" as domestic bottlenecks remain, says a report.
Although higher world growth is likely to buoy exports, a strengthening rupee and worsening domestic bottlenecks could limit the increase, it said.
"Stronger exports and higher FDI inflows have likely contributed to the strong performance of the INR is recent times. While both are likely to remain buoyant, we believe it is important to note that incremental gains over the short term may not be limitless," HSBC said in a research note.
The global financial services major noted further that world growth explains just a third of India's exports performance and as long as domestic bottlenecks remain a constraint, exports may not revive with full 'gusto'.
Besides stalled investments, domestic constraints include cotton availability for textiles, irrigation facilities for agriculture, FDI for engineering goods, human capital for software exports and tariff rates for all. FDI inflows doubled to US $46 billion in 2016 from US $22 billion in 2013.
Moreover, FDI outflows have also been falling, resulting in a rapid rise in net FDI gains for the economy. So much so, net FDI alone has completely funded India's current account deficit over the last three years, HSBC said.
Though incremental inflows may not be as rapid as was seen in 2016, overall FDI inflows this year are likely to be strong enough to finance India's current account deficit.
Over the longer term, FDI inflows are likely to rise, given India's reform momentum, bright growth prospects, enhanced macro stability, sustained increase in FDI limits, and easier regulations.
