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US-China trade war to impact FPI inflows: Report

Press Trust of India  |  Mumbai 

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

"We expect the US-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 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 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 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.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, July 09 2018. 15:45 IST