FII money: FII inflows into equity and debt in 2014 will top $40 billion according to sources – the highest ever. Of this, the greater proportion (60 percent) has gone into debt. These may abate with the fall in interests. Once they do, FIIs could shift money from debt to equity, but this process will not happen all of a sudden. Also, if rates fall, that is a reason to invest in equity.
The government, the reforms,the stability: As long as Modi and the BJP keep winning various state elections, confidence in reforms and governance will keep improving. It is obvious that the big shift in investor and corporate mood after mid-2013 came with the prospect of a change in government in May 2014. With the onset of benign and lucrative business environment, increasing FII’s, and governments reforms to increase FDI in public sectors as railways and defense, the government has given a conducive environment for both domestic and foreign investors.
Inflation: Both wholesale price inflation and retail inflation are trending down, the former more than the latter, because of benign global commodity prices and moderated food procurement price increases, among other things.
Inflation: Both wholesale price inflation and retail inflation are trending down, the former more than the latter, because of benign global commodity prices and moderated food procurement price increases, among other things.
The RBI’s role: The central bank under Raghuram Rajan has been a pillar of strength for the Indian economy because he has not been stampeded into cutting rates prematurely. Nor has he allowed the rupee to appreciate wantonly. Given the volume of FII flows, the rupee should have appreciated to 57-59 to the US dollar, but it is at around 61.75 (as in mid-morning trades 24 November). Rajan’s RBI has prevented a rupee spike by buying dollars – and the forex reserves (over $315 billion as of 14 November) reflect this. Rajan’s policy is driven by two objectives: preventing an exchange rate shock by keeping the rupee depreciating steadily just in case the US starts raising interest rates and capital flows temporarily reverse (the rupee’s normal depreciation rate is about 5-7 percent per annum). The second objective is to keep returns on debt positive with relatively high rates. This ensures that FII investments in debt remain attractive even while promising lower inflation. Rajan has ensured that there will be no sudden exit of FII money in the foreseeable future – which means up to mid-2015 at least – no matter what the US Fed does.
