Re rides high on capital inflows

Portfolio flows are continuing their buoyant run in the new year. Investment by foreign institutional investors (FIIs) in the Indian capital markets – including debt and equity – have touched $2.6 billion so far in 2010.

And, the inflow data does not include new foreign currency convertible bond (FCCB) issues and external commercial borrowings (ECBs) which have staged a comeback.

The large FII flows have already pushed the rupee to a 15-month high and the expectation is that the appreciation may continue on the back of unabated capital flows during the year.

While the government and the Reserve Bank of India, which reviewed the trends, have said that capital flows were not a cause for concern at the moment, the central bank has acknowledged that if the funds continued to come in large amount, monetary policy calculations would need to factor in this issue as well.

A source associated with the review told Business Standard that during the current financial year, inflows might not pose too much of a challenge. But there could be some pressure in the next financial year if the current pace continued.

Latest data suggest that between April and November 2009, RBI sold $2.6 billion (Rs 12,724 crore) of securities in the market to ensure that there was no steep depreciation of the rupee. Since then, the trend has completely reversed.

According to data available at the website of the Securities and Exchange Board of India, between January 4, the first day of trading in 2010, and yesterday, FIIs have pumped in $1.65 billion into equities, while $950 million has flown into the debt segment. Bankers said that investment into equities, which were estimated at $17.5 billion in 2009, did not come as a big surprise. The interest rate differential between Indian and the development markets made debt too attractive for foreign investors to maximise yields, they added.

During this period, the rupee has risen 1.45 per cent to 45.64 against the dollar from 46.31, the closing rate on January 4. Against the Chinese currency, the rupee has appreciated 1.44 per cent, while the rise against the euro was around 1.01 per cent.

Japanese finance house Nomura Securities said in a note that the rupee was expected to touch 42.30 against the greenback by the end of March due to rising capital flows.

While estimates on inflows vary, bankers said that they would be close to last year’s level, if not more.

“Due to huge inflows, the rupee has developed artificial upward movement. The rising crude oil prices and increase in imports would widen the trade deficit,” said Bank of Baroda Chief Economist Rupa Rege Nitsure.

Inflows apart, Bank of India Executive Director BA Prabhakar said that rupee would also strengthen due to inflows on account of auction of the third-generation mobile telephony licences, which could fetch the government close to $17 billion (Rs 30,000 crore).