US-China trade war to impact FPI inflows: Report

The US-China trade war will impact foreign investment into the country, and the Reserve Bank of India (RBI) will have to sell foreign currencies to defend the rupee at the 69 level to a dollar, a report said today.

"We expect the US-China trade war to further discourage FPI (foreign portfolio investment) flows, although the direct real impact will be limited with exports just 12 per cent of GDP," brokerage Bank of America Merill Lynch said in a note.

Domestic impact of the trade war will be felt more in the financial markets, it said, adding that the situation is akin to the 2008 global financial crisis.

This will force the RBI to "step up" forex sales to defend the rupee at the 69 level against the dollar, it said.

Apart from the likely impact to investment flows, there are other factors like adversities on seasonal elements, banks' low nostro balances and stronger USD globally which will put pressure on the rupee and the RBI has to contend with, it added.

If the flows do not revive, the RBI will have to sell USD 20 billion of the over USD 400 billion in forex reserves in order to ensure that the current account deficit comes at 2.4 per cent of the GDP, it said.

It can be noted that the forex assets have declined by USD 19 billion since April, as the rupee continues to be under pressure. In the first six months of the year, foreign investors have pulled out Rs 6,000 crore from the equity markets and Rs 41,000 crore from the debt markets due to the trade tensions and macroeconomic issues like the surge in oil prices, according to reports.

The brokerage report said if the rupee slips to 70 against the greenback and the portfolio flows continue to remain dry, the government may launch one more edition of the NRI bonds by December quarter, through which it can attract up to USD 35 billion.