T

he general impression about foreign investors losing interest in India is not exactly borne out by facts. The current year so far has seen foreign institutional investors (FII) pour in almost $9 billion into the country's stock markets. This is not small even when one compares it to the record $29 billion of inflows in 2010. The latter figure is also for the entire calendar year, as against just slightly over four months that have gone by in 2012. The latest number thus stacks up quite favourably on a pro-rata basis with that of the year 2010. The 2010 numbers were also inflated by the large inflows received on account of Coal India's mega IPO. The available evidence thus suggests that there is a certain momentum in the flow. Of course, one can also attribute the robust FII inflows this year to the sharp decline in stock prices that sent the Sensex crashing by almost a quarter in 2011. That itself may have made valuations more attractive for FIIs to eye buying opportunities and pour in fresh money into India. But again, it is to be noted that the FIIs were not really the ones to have brought down the Indian markets last year: Net withdrawals by them amounted to a mere $357 million, which is way below the $12 billion or so that they pulled out during the global crisis year of 2008.

The upshot of all this is that FIIs are not as bearish about India as is generally made out to be. On the contrary, they appear quite willing to wait till it is time to buy again. Indeed, even the recent lowering of India's long-term rating outlook by Standard & Poor's, or the imbroglio over taxing equity flows from tax havens, has not really caused any exodus of these funds. The impression of large outflows appears to have gained ground mainly from the rupee's weakening, which is, in turn, attributed to FIIs. The reality is that foreign portfolio — even direct investment, for that matter — inflows have been fairly robust. The rupee's significant depreciation in the recent period has less to do with them as much the current account deficit, which has widened beyond levels that even normal capital flows can finance.

Having said that, the Government cannot afford to take FII flows for granted. Of late, it has tended to send mixed signals. While on the one hand, it has been relaxing rules for private equity and venture capital investors, on the other hand, it has also been alienating a chunk of FIIs by threatening to invoke anti-avoidance rules or impose curbs on trades through participatory notes. This is no time for rhetoric on overseas funds, even if the structure of some of their transactions smacks of tax avoidance. The Government must also signal its willingness to attract FII investments in debt instruments by improving the policy environment for attracting inflows into this market. This calls for, principally, liberalising the norms for banks to seamlessly shift monies between those held for maturity and those held for trading.

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