Impact of Foreign Flow on the Rupee & Indian Economy

TOPIC: GS PAPER III Indian Economy

Issues relating to planning, mobilization of resources, growth, development and employment.

INTRODUCTION:

Markets regulator is concerned about the flow of foreign funds into India, it’s likely impact on the currency and also the country’s export competitiveness at a time of slowing economic growth. Suggested a calibrated approach to managing foreign flows, which could be non-disruptive for the economy.

FOREIGN PORTPOLIO INVESTORS(FPIs):

In economics, foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, sometimes for speculation.
Foreign portfolio investors (FPIs), so far this year, have made net investments of around Rs 1.72 lakh crore in equities and debt.

Interestingly, preference for debt around Rs 1.29 lakh crore. Investments in debts are nearly three times of equities, where net investments are Rs 42,847 crore. Such inflows have resulted in the rupee appreciating around 6 per cent this year, thus affecting export competitiveness.

The regulators should be worried about the vast inflows and these should be allowed through a calibrated mechanism.

A huge amount of foreign inflows at a time when the currency has been substantially appreciating is something the regulators must be concerned about.

We need to be very careful as far as allowing foreign flows into the country are concerned. We can think of other ways of allowing these flows under a calibrated system.

Foreign fund inflows have touched $27.2 billion (Rs 1.77 lakh crore), of which $20.1 billion has come through the debt route while the balance $7.1 billion through the equity route. In comparison, there was a net outflow of $3.9 billion in 2016 and $10.5 billion in 2015, according to CDSL data.

Supported by India’s record forex reserves of $395 billion as of August 25, the rupee has appreciated 5.6% against the dollar so far in the year. An appreciating rupee against major currencies — at a time when crude oil prices are almost stable — is leading to concerns about how this could impact India’s export competitiveness

Masala Bond Overview:

Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is an Indian word and it means spices. The term was used by IFC to evoke the culture and cuisine of India.

 Masala bonds — the rupee-denominated corporate bonds — that are being sold to foreign investors. Masala bonds don’t hold any currency risk as far as the country is concerned. But at the same time, external liabilities of the country go up. This is something which we need to bear in mind.

The high amount of buybacks in the market compared to earlier years. It is found that the capital that was returned back to shareholders in the form of buybacks and dividends was 1.5 times the equity capital raised in 2016-17. So the equity capital raised was pretty impressive last year, but the amount which went back…shows more money went back to investors against money being raised from them.

Maintain high standards of corporate governance, disclosures and accountability of the board. He also warned statutory auditors about the sanctity of financial statements.

Masala bonds are debt instruments through which designated domestic entities can raise funds by accessing overseas capital markets, while the bond investors hold the currency risk.

The Masala bonds account for 39 per cent of the total external commercial borrowings (ECBs) of $7.39 billion reported by the Reserve Bank in the fourth quarter of 2016-17.

The domestic mutual fund industry to bring down its total expense ratio which is far higher than the comfort level. At present, the regulator had mandated a ceiling of 2.5 per cent on the expense ratio.

Mixed trend Of Rupee:

The rupee and stocks moved in different directions today. The Indian currency rose 2 paisa to 64.10 against the dollar, while BSE bellwether Sensex fell 148 points to 31661.97.

The rupee recuperated from early plunge and ended with marginal gains even as geopolitical worries continued to cast a shadow over forex trading. The domestic currency today recorded its first gain in the past four sessions.

CONCLUSION:

Needs to be done on corporate governance. Serious issues that enhance participation of minority shareholders and protect their rights, independence of independent directors and their active participation are in place. Improved disclosures on related party transactions and accountability and evaluation of boards are issues that seriously need to be looked into.

QUESTION ARISING FROM THIS TOPIC:
.Q1) What is the impact of strong foreign inflows on the rupee and Indian economy that amid slowing economy growth? Explain
REFERENCE: TELEGRAPH, TIMES OF INDIA, DNA, 24 Nov