Who needs a few dollars more in debt?–Economic Times–11.10.2017

We in India seem hooked to foreign debt inflows, never mind the myriad macroprudential risks involved, including artificial strengthening of the rupee. The Reserve Bank of India (RBI) last week raised, yet again, the investment limit for foreign portfolio investors (FPI) in government securities by a few billions of dollars more, but only for this quarter. The cap on FPIs for pouring money into government securities (G-secs) now stands at Rs 2.5 lakh crore. Such inflows need to be purposefully curbed.

The ever-rising investment limit on G-secs for FPIs together with the high relative interest rate structure here is perverse incentive to indulge in easy arbitrage opportunities that can adversely affect the real economy. The fact is that FPIs have been relentlessly pouring money into Indian debt, which has hardened the rupee, jacked up the current account deficit and hugely decelerated export growth as well. Worse, the inflows have essentially served to inflate asset prices, and meant no apparent productivity gains for the economy, even as the rupee has steadily appreciated.

We clearly need proactive regulation of foreign debt. The point is that foreign debt funds can exit in a flash, with severe consequences for the real economy and the financial system. In any case, an artificially rising rupee sans underlying productivity improvement really makes no sense. The way forward is to gainfully boost allocation for long-term investors like pension and insurance funds, and discourage foreign inflows into short-term debt. The bond market regulator, Securities and Exchange Board of India, is to issue operational norms for allocation and monitoring the new FPI limits in debt paper. It would make sense to mandate minimum holding periods for FPI holdings in debt, to discourage short-term inflows; an explicit tax can be a deterrent too.

It is a welcome indicator that savvy FPIs are keen to pour money into the debt market here. But such inflows must not unduly affect the real economy and rev up financial returns for investors abroad. A middle path in terms of foreign debt regulation seems warranted.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

via Who needs a few dollars more in debt?

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