Foreign Investors Creeping Back Into India

After three months of net outflows, data released yesterday showed some foreign investors were creeping back into India even though the country is in the midst of elections.

Net foreign portfolio investment inflows totalled $36.1 million during February 1-13, the Securities and Exchange Board of India said.

Foreign institutional investors (FIIs) had withdrawn around $200 million from Indias equity and debt markets after the Asian financial crisis struck India at the end of October.

The fall of the government at the Centre also counted against the country and many investors are waiting to see what kind of government emerges before committing funds.

 

Until last November, India had never suffered a net outflow in any month since FIIs first entered the country in 1993.

The cumulative total of FII investment, which is virtually all confined to the equity markets, was $8.93 billion on February 13.

The scale of FII holdings in India has raised concern in some quarters about the quality of the foreign currency reserves. Together with short-term debt they account for just over 75 per cent of the countrys foreign currency reserves.

In the event of a confidence crisis these lenders will recall their loans and investors will repatriate funds rapidly, as happened in Southeast Asian markets in the past few months.

NRIs, who have the equivalent of nearly $10 billion deposited in the country, could also start selling their rupees and sending money out of India. Most of these funds are held in three to five year deposits, but some money would be withdrawn if NRI depositors became worried, analysts said.

If investors did rush for the door they will lose money on the way, mitigating the impact on reserves slightly, analysts said.

FII holdings that have a market capitalisation worth around $7 billion currently could be reduced to $5 billion or even less if there was a mass panic lessening the impact on reserves, they said.

Last month, fears that the BJP was considering imposing a lock-in period for foreign portfolio investment if it won power sent shivers through FIIs. But the BJP excluded any such commitment from its manifesto, reducing alarm.

Total foreign exchange reserves, which include gold and special drawing rights stood at $27.74 billion on February 6, down from just over $30 billion at the start of November.

The foreign currency component has sunk to $24.36 billion, from $26.27 billion at the end of October, and is equivalent to around seven months imports.

Central bank defence of the rupee, which has slid eight per cent since August to hit an all-time low of 40.45 per dollar in mid-January, was the main factor behind the erosion in reserves.

The rupee closed at 38.85/86 per dollar yesterday, and has held steady around these levels since the RBI raised interest rates and squeezed liquidity in mid-January.

Credit Rating Information Services of India Ltd (Crisil) threw a spotlight on the fault lines in the composition of Indias reserves in a research paper released last week.

All we are saying is that if there is an event, like those that happened in Southeast Asia, that prompted withdrawals of capital and people to call in loans the situation could be vulnerable, Anil Kumar, assistant general manager at Crisil author of the report, said.

Indias economy has been buffeted by the storm in Asian markets, but it was relatively immune to the contagion that swept through the Asian Tiger economies.

Its current account deficit is comfortable at less that 1.5 per cent of gross domestic product. Its banks are not heavily exposed to the property markets as happened in Southeast Asia.

Its central bank keeps close tabs on overseas debt, diminishing the chances of a nasty surprise, and short term debt is less than 20 per cent of total debt.

And the currency is only convertible on the current account, not the capital account, giving the central bank more control.