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Capital High: Foreign Investment in India

  • Category
    Economy
  • Published
    11th Apr, 2019
  • The inflow of foreign capital into India’s stock market in the month of March hit a high of $4.89 billion, the biggest foreign inflow into Indian stocks since February 2012.
  • As a result, the stock market rose a solid 8% in March.

Context

  • The inflow of foreign capital into India’s stock market in the month of March hit a high of $4.89 billion, the biggest foreign inflow into Indian stocks since February 2012.
  • As a result, the stock market rose a solid 8% in March.
  • Foreign investment in Indian equities stood at $2.42 billion in February, as against a net outflow of $4.4 billion during the same month a year earlier, and is expected to be strong in April as well.

About

  • The rupee has appreciated by about 7% since early October, when it was reeling at around 74 against the dollar.
  • Last year, India received more foreign direct investment than China for the first time in two decades.
  • While the Chinese economy has been slowing down considerably in the last one year, India has emerged as the fastest-growing major economy. 

Reasons for the Inflow:-

  • There is a sense among a section of investors that their fears of political instability are misplaced. Also, there are clear signs that western central banks have turned dovish.
  • Both the Federal Reserve and the European Central Bank, for instance, have promised to keep interest rates low for longer.
  • This has caused investors to turn towards relatively high-yielding emerging market debt. Indian mid-cap stocks, which suffered a deep rout last year, are now too attractive to ignore for many foreign investors.

Challenges-

  • To retain investor confidence, there is a need to increase the pace of structural reforms and also ensure proper macroeconomic management with the help of the Reserve Bank of India.
  • Long-pending reforms to the labour and land markets are the most pressing structural changes that will affect India’s long-term growth trajectory.
  • The high fiscal deficit of both the Centre and the State governments and the disruptive outflow of foreign capital are the other macroeconomic challenges.

Significance

  • The return of foreign capital is a good sign for the Indian economy. 
  • But policymakers need to be careful not to take foreign investors for granted.
    Other emerging Asian economies will be competing hard to attract foreign capital, which is extremely nimble.
  • Any mistake by policymakers will affect India’s image as an investment destination.
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