Every day I see in the newspapers, about the great bull run and a gala time for Indian investors, reaping money after a long sluggish phase at the markets. A lot of FII (Foreign Institutional Investors) are partly responsible for this surge in the markets. Foreign investors are looking at India as a great investment destination. More’ so, India is growing and is a safe bet, especially considering the global economic scenario and the financial situation in the US.
In fact I just read a quote from Dr. Vijay Mallya himself, where he said he was happy to see India slowly becoming the preferred global investment destination. But then why the sudden shift in India as an investment hub. Well not just India, but most of the developing countries have seen a rise in global investment trends.
A recent report on Chinese growth trends reaffirms the faith in the global investor that Asia is indeed on a growth track, and this is the time to invest to reap huge long term returns. However there is another reason for this strong shift in investment patterns.
One is the second phase of Quantitative Easing by the US Fed Bank. Apart from this major banks are providing zero interest loans to investors investing in high yielding assets such as securities and debt. Considering India as a perfectly positioned emerging economy, investors are now investing huge sums of money in the Indian market.
However, the question arises whether these are good signs for India in the long run. From one point of view, it is a good move as India is gaining large amounts of foreign exchange and the markets are on an all time high.
On the flipside, more foreign exchange puts upward pressure on the rupee, causing it to appreciate. This could affect the profitability of exporters. Inflationary figures also tend to increase due to this. So what is the solution? One of the things to look out for is whether this trend would continue or is it a passing phase.
Countries like Thailand have already introduced capital controls like adding a tax slab on bonds. However if this trend is just a passing phase, introducing capital controls could hurt our investment scenario in the long run as investors react strongly to such controls.
It is thus a tough call for the RBI, yet I feel that capital controls in the currency markets would ensure that exporters interests are protected and we do not lose out too much with heavy rupee appreciation and an out of control inflation rate.
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