GS Paper 3
Syllabus: Effects of liberalisation on the economy (post-1991 changes)
Foreign portfolio investors have pulled out Rs 42,000 crore this month amid rising inflation and monetary policy tightening in the US.
What are Foreign portfolio investors (FPI)?
FPI involves an investor buying foreign financial assets such as fixed deposits, stocks, and mutual funds. All the investments are passively held by the investors.
Why is capital flowing out?
- Playing safe: Investors see relatively high valuations in India, rising bond yields in the US, an appreciating dollar and concerns regarding the possibility of a recession in the US triggered by a rate hike in the US as the possible reasons for their pullout.
- In India, inflation surged to an eight-year high of 7.79% in April, prompting the RBI to hike the repo rate by 90 basis points to 4.90%.
How does it impact the markets and the rupee?
India’s foreign exchange reserves have fallen $46 billion in the last nine months to $596.45 billion as of June 2022, mainly due to the dollar appreciation and FPI withdrawals.
- Rupee depreciation may lead to higher import bills: A strong dollar (and weaker rupee) is good for export-oriented companies but bad for import-oriented industries such as oil, gas and chemicals.
- With the dip in the rupee, oil imports and other imported components will get costlier, which will further lead to higher inflation.
How do FPIs operate?
In times of global uncertainty, FII moves money from risky assets such as equities and add more bonds and gold. When interest rates rise in the US and other advanced economies, they withdraw money from emerging markets such as India and invest in the bonds in their domestic markets. The 10-year US bond has shot up from a low of 0.54% in July 2020 to over 3.30% now.
How big are FII in India?
FPIs are the largest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of the market.
Will the rupee fall further?
The rupee has continued to depreciate despite the RBI selling dollars from its forex reserve to stabilise the currency. The rise in US inflation, rate hike worries and the stock market fall may drive further weakening of the rupee in India.
Also read a related article on central bank raising interest rates and its impact : 22nd June CA
Q. Examine the role played by Foreign Direct Investment and Foreign Institutional Investors in the economy of the developing countries. (150 words, 10 marks)
Q. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (UPSC CSE 2020)
a. It is the investment through capital instruments essentially in a listed company.
b. It is a largely non-debt creating capital flow.
c. It is the investment which involves debt-servicing.
d. It is the investment made by foreign institutional investors in Government securities.
Q. With reference to the Trade-Related Investment Measures (TRIMS), which of the following statements is/are correct? (UPSC CSE 2020)
- Quantitative restrictions on imports by foreign investors are prohibited.
- They apply to investment measures related to trade in both goods and services.
- They are not concerned with the regulation of foreign investments.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3 only
Q. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two? (UPSC CSE 2011)
(a) FII helps bring better management skills and technology, while FDI only brings in capital
(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors
(c) FDI flows only into the secondary market, while FII targets the primary market.
(d) FII is considered to be more stable than FDI
Sources: Indian Express