Is India vulnerable to an investment capital crash?

The risk is growing, warns Morgan Stanley, if India continues on its reckless spending path.

The Reserve Bank of India has announced fresh purchases of billions in government securities, which will put added pressure on the country's balance of payments.

When coupled with stabilizing measures for the rupee currency, this move could leave India "exposed" to slower capital inflows and a higher domestic cost of capital -- consequences that the government can curtail with more prudent spending.

Here's more from Morgan Stanley:

As we have been highlighting, the risk of balance of payments (BOP) stress remains high. Unless the government initiates major policy action to cut its spending (including subsidies) and/or international crude oil prices decline sharply due to improved outlook of global supply soon, India will remain exposed to any potential slowdown in capital inflows – increasing pressure on the exchange rate, which in turn would keep the domestic cost of capital high.

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