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V.V. Krishnan

Mr Pranab Mukherjee, Union Finance Minister (file photo). —

Our Bureau

New Delhi, Nov. 18 The Finance Minister, Mr Pranab Mukherjee, said on Wednesday that though the huge foreign capital inflows are not a concern for now, the Government is monitoring the situation and will take action against any distortions.

Foreign institutional investors (FIIs) have pumped in over Rs 71,900 crore (around $15 billion) so far this year in the country’s stock exchanges. “It (huge FII inflows) is not a matter of concern. We have a system of monitoring it. We will have arrangements to counter any distortions whenever we find them. Therefore, it (FII inflows) will not be disturbing,” he told reporters here.

Assocham has recommended a moderate two per cent tax on foreign inflows into Indian capital market till governments in economies of scale withdraw their stimulus package and pressure their federal bank to increase interest rates.

Without such a deterrent, FII inflows will lead to further rupee appreciation and create asset bubbles, besides weakening domestic export competitiveness and fuelling inflation, it said. When foreign inflows were subjected to moderate taxation in Brazil, it worked successfully without inviting any criticism, the chamber said.

Foreign investments in Indian equities may touch $18 billion this fiscal, Assocham said. If it does, it will be higher than the existing record of $17.7 billion in 2007.

FII investments of over Rs 71,900 crore so far this year is the highest ever investment made in rupee terms in a single year. The previous high was in 2007 when FII inflows in stock markets stood at Rs 71,486 crore.

FIIs have also net bought debt of Rs 11,890 crore leading to rupee appreciation by over five per cent during the last six months. This has hit exporters who are already suffering from poor demand in the developed markets. Exports have shrunk for 13 straight months and declined by 11.4 per cent to $12.5 billion in October this year.

According to media reports, the RBI may not restart sale of bonds under the Market Stabilisation Scheme to take out surplus liquidity in the system since the excess money is currently not causing any uneasiness.

Mr Abheek Barua, Chief Economist, HDFC Bank, told Business Line that while the core component of FII is dedicated and is unlikely to pull out, the hot money component can exit quickly. In 2006 and 2007, it was found that 40 per cent of FII inflows were from hedge funds coming through the Participatory Notes route, he said.

“The Finance Minister is trying to create some headroom for the Government to impose some restrictions on portfolio flows,” he said.

The Government could impose a curb in the guise of regulatory control on funds of dubious origin and those lacking transparency, he said. Such curbs could also prevent over-valuation. While SEBI could impose curbs on PNs, the RBI can bring in curbs on external commercial borrowings, he said.

“The communication (on the curbs) should be subtle since not all PN funds are of dubious origin. Brazil’s was blatant and a ‘command and control’ one. But today there are lot of takers for capital controls as there is lots of useless money floating around. This hot money has costs that exceed benefits,” he said.

More Stories on : Foreign Institutional Investors | Industry Associations

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