Modi Government could face Rupee problems as foreign inflows double – report

Riding on huge expectations from the incoming Modi Government, global investors are gung ho on the Indian economy which is expected to see a doubling of foreign investment inflows- including FDI and FIIs- to above USD 60 billion in the current financial year than about USD 29 billion in the fiscal 2013-14, an ASSOCHAM study has projected.

“In a way, the emerging situation will pose a new challenge to the Reserve Bank of India to deal with the problem of plenty on its impact on the Rupee rate and inflation from the increased amount of cash into the system,” it said.

The Indian rupee has already gained about 6% this year and is trading at about 58 to the dollar. Further increases would dent the competitiveness of India’s exports in foreign markets.

India exports textiles, handicrafts, fruits and several other items to markets like the US and Europe. India also exports about $100 billion worth of services, such as BPO and IT services, which could all be impacted by a sharp rise in rupee’s value. On the other side, the price of petrol could fall.

Assocham said the new Finance Minister and the RBI will have to be on the same page in dealing with this scenario which will see strengthening of Rupee and a further improvement on the current account balance. The ‘problem of plenty’ will force RBI to sterilise the inflows by injecting cash into the system, it said.

“The first immediate remedy to deal with the issue would be to straight away remove import restrictions and customs duty on imports of gold as these measures were taken in an extra-ordinary situation that is behind us. Besides, the curbs on gold imports have hit the gems and jewellery trade and industry badly. The step could be taken in the first Budget of the Modi Government and will be seen as a people-friendly measure,” the paper said.

“The net foreign investment inflows, led by aggressive foreign institutional investors (FIIs) in the Indian equity and debt markets in 2014-15 , are expected to even overtake the figure of USD 46.17 billion during fiscal 2012-13, one of the best years for overseas investment inflows,” according to the ASSOCHAM paper: Global Investors’ Expectations from New Indian Government. In the FY, 2012-13, the FII inflows had led the table with USD 27.58 billion while the net foreign direct investment (FDI) had aggregated to USD 19.82 billion.

“The unfolding scenario also points to easing of prices and lowering of interest rates, the two major challenges that the Indian economy had been facing for some years now,” ASSOCHAM President Mr Rana Kapoor said.

In the current fiscal as well, the FII investment would remain more than the FDI inflows. The expectations are that the FII investment in both debt and equity could exceed USD 35 billion while the FDI money could be above USD 25 billion.

“If the Modi Government is able to take some reforms friendly measures along with taming inflation and earning goodwill of the people, the FDI will do a fast catch-up with the FIIs. Typically, since the FDIs are long-term commitments, there would be a lag, the paper noted.

Significantly, India will continue to outpace all other emerging economies in terms of FII inflows which would not be affected much by the tapering of the Quantitative Easing by the US Federal Reserve, excepting some minor jerks.

On the other hand, as the new government goes about removing obstacles in new investment and eases the process of investment, the FDI is likely to pick up again in the key infrastructure areas of ports, airports, roads and energy.

Besides, the new Finance Minister is expected to assure the global investors that the government would not resort to retrospective taxes while the policy issues stuck in courts and tribunals are expected to smoothen out.

“The euphoria must be taken advantage of and things will move on from there,” said Mr Kapoor.