Foreign Portfolio Investors–Too much of a not-so-good thing–Economic Times–12.09.2017

Foreign portfolio investors (FPI) have been relentlessly pouring money into Indian debt for eight months in a row, with total investment on this score adding up to $20 billion this year.

The buoyant funds flow has hardened the rupee, thoroughly decelerated export growth, and has led to no apparent productivity improvement in the real economy. We need proactive regulation of foreign debt, boost allocation for long-term investors and stem short-term debt inflows.

The point is that short-term foreign debt funds can exit in a jiffy, which can have macro-prudential consequences for the financial system. Besides, it makes no sense to keep the rupee artificially high. It is essential to step up cross-border flows by long-term investors.

Meanwhile, the markets regulator, Securities and Exchange Board of India (Sebi), has for the July-September quarter marginally raised the FPI debt limit in central government securities to Rs 1,87,700 crore.

In tandem, the investment limit for long-term FPI, such as sovereign wealth funds, pension funds and multilateral agencies, has likewise been raised to Rs 54,300 crore. The Sebi circular also requires that future increases of FPI limit in government debt be allocated in the following ratio: 75 per cent for long-term category FPI and 25 per cent for other FPI. But note that only about 20 per cent of government debt in FPI holdings are with long-term investors. Looking ahead, the ratio needs to be purposefully increased to boost investor commitment.

The RBI, which regulates the auction of treasury bills, needs to be much more circumspect when it comes to allocating short-term government securities to general category FPI, never mind the competitive bidding in such auctions.

More important, the RBI needs to review its interest rate policy. It cannot be gainsaid that the high relative interest rate structure in India is perverse incentive for overseas funds to aggressively seek arbitrage opportunities here. Speculative flows that enrich short-term capital while hurting India’s real economy should be reined in, with taxes or minimum holding periods.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Too much of a not-so-good thing

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