Reliance on FPIs Making India Vulnerable to Global Shocks
Foreign Portfolio Investment (FPI) has risen several folds since the Indian economy started to open up. While the FPI inflow has powered markets to record highs on several occasions, some experts say India's dependence on them has also left the economy exposed to global shocks such as trade war.
Rating firm Ind-Ra in a recent report said that "India's increased dependence on foreign portfolio investment (FPI) makes the country highly vulnerable to global shocks. As the FPI inflows are fickle in nature, they can be quite destabilising for the exchange rate and the overall economy".
It also added that the surplus generated in the services trade combined with remittances is insufficient to cover India's trade deficit owing to which the country has been witnessing Current Account Deficit (CAD).
"Even the net Foreign Direct Investment (FDI) which is part of the capital account is insufficient to bridge the CAD. Since the current account plus net FDI is negative, India is dependent on FPI, the other major component of capital account, to fund this gap. The current account plus net FDI has been positive for some of India's peers such as China, Brazil and Russia", the report added.
Post general election, a rush of FPI money was seen in the Indian markets. Sensex and Nifty touched life-time high as portfolio investors rose their bets on the Indian markets over political stability that it achieved in May.
But the FPI money or 'hot money' as it is often referred to because of its fickle nature of moving in or out of an economy at the slightest news of positive or negative developments, turned away big time in October last year, pulling out $ 16 billion from the Indian market. The rupee depreciated to 73.37 from 66.78 in April 2018 against the US dollar in October.
FPIs, experts say, have dual characteristics: it not only affects the equity market, the movement in the currency market is also determined to an extent on the FPI money.
Indian markets have along with others felt the heat of the US-China trade war. Lately, these factors added to the slowdown concerns in the domestic markets which made matters worse.
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