Foreign investments into the Indian economy are expected to more than double, with inflows from both foreign direct investment and foreign institutional investors set to surge above $60 billion in the current financial year compared with $29 billion in fiscal 2013-14, an Assocham study has said.

The study has suggested that the new Finance Minister and the Reserve Bank of India (RBI) would have to be on the same page in dealing with this scenario, which will see strengthening of the rupee and a further improvement in current account balance. However, the "problem of plenty'' would force RBI to sterilise the inflows by injecting cash into the system.

"The first immediate remedy to deal with the issue would be to straight away remove the import restrictions and Customs duty on the import of gold as these measures were taken in an extraordinary situation. 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 would be seen as a people friendly measure,'' the Assocham note said.

It added that the net foreign investment inflows, led by foreign institutional investors (FIIs) in the Indian equity and debt markets in 2014-15 , were expected to overtake the figure of $46.17 billion during fiscal 2012-13, one of the best years for overseas investment inflows, according to the Assocham paper.

In FY2012-13, FII inflows had led the table with $27.58 billion, while net foreign direct investment (FDI) had aggregated $19.82 billion.

In the current fiscal as well, FII investment would remain more than FDI inflows, the paper has said, adding, that the FII investment in both debt and equity could exceed $35 billion, while the FDI money could be above $25 billion.

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

Significantly, India would 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, it added.

(This article was published on May 25, 2014)
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