The Hindu Business Line : Economists differ over likely FII response

Thiruvananthapuram, Oct. 15 Leading economists have welcomed the coordinated measures taken by the Reserve Bank of India and the Finance Ministry intended to boost domestic liquidity.

But they tended to differ in their outlook on possible implications from raising FII cap on investments in corporate debt as well as on re-capitalisation of banks.

Dr D. K. Joshi, Director and Principal Economist, Crisil, was not sure of FII interest in low-rated Indian debt. He would prefer to watch with interest the FII moves in this direction.

According to him, the attempt may have been aimed at ‘reversing to a limited extent’ the FII outflows that had drained liquidity like never before.

Mr Abheek Barua, Chief Economist, HDFC Bank, was optimistic that Indian corporate debt would be able to kick up some interest even now. He was confident that the enhanced leeway for NRI deposits too would help, given the huge interest rate differentials involved.

Why recapitalisation?

Mr Ananda Bhoumik, Senior Director, Fitch Ratings, wondered as to what could have possibly triggered the re-capitalisation drive from the Centre. “There is no crisis as such in the banking industry,” he observed, but hastened to add that he had no access to details of the scheme announced.

He was not sure if prevailing global liquidity concerns would allow the luxury for FIIs to look at India all over again. The concerted action from the regulator and the Finance Ministry may have been ‘pre-emptive’ in nature, Mr Bhoumik said.

Asked if the coordinated action could be mistaken for ‘panicky policy making’, the economists replied in the negative, emphasising that the times were still challenging and called for such a response.

The crisis of confidence in the banking sector is very much palpable in the global context.

According to Mr Barua, the CRR has been leveraged to such an extent that it does not any more warrant tweaking of the SLR.

Between the two, the CRR was the weapon with the most effect, Dr Joshi observed.

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