Emerging markets have become the hot investment,  and India’s exchange traded funds (ETFs) took in their fair share. However, the inundation of foreign investments into India threatens to disrupt the country’s economic recovery and the government may have to step in to stem the tide.

Foreign investors funneled more than $15 billion to Indian equities in 2009, sending stocks up more than 75% and strengthening the rupee, reports Rajesh Kumar Singh for Reuters. With expected positive growth rates for the year and higher interest rates differentials that favor emerging markets, investors are looking to India as a good place to stash their wealth. (India’s rising small-caps).

The Reserve Bank of India (RBI) has already taken the necessary precautions to stave off a potential asset bubble forming in India’s stock and real estate markets. India’s officials are welcoming the fund inflows with open arms, but Finance Minister Pranab Mukherjee says monetary tools will be implemented if inflows become disruptive to the economy.

India could stem inflows by:

  • Imposing taxes on inflows; this is considered to be the most likely tactic the government would take, especially when it comes to inflows that could lead to a housing bubble
  • Auctioning quotas for foreign credit to increase the cost of raising funds
  • Using market intervention bonds and raising cash reserve ratios

The Organization of Economic Cooperation and Development (OECD) estimated that India’s economy will grow more than 7% in 2010, followed by a 7.5% expansion in 2011, according to RTTNews. The latest high-frequency indicators show signs of a recovery path, but the short-term recovery will be dampened by poor rainfall. The OECD has also expressed concerns over India’s rising inflation and fiscal deficit. (India’s next step).

For more information on India, visit our India category. Read  more about the BRIC economies in our special report.

  • PowerShares India (NYSEArca: PIN): up 71% year-to-date

  • WisdomTree India Earnings (NYSEArca: EPI): up 862% year-to-date

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.