Tuesday, August 19, 2008


FII ke side effects
Good cause, but be circumspect?

Despite having a foreign exchange reserve of over $260 billion & control on over a trillion dollar economy, the Reserve Bank went through challenging phases this year, curbing & containing the country’s ‘fair weather friends’, the Foreign Institutional Investors (FIIs). Till 26th Nov., this year, FIIs have already pumped in nearly $17 billion and affected country’s economic health & given sleepless nights to its monetary regulator, Reserve Bank of India.

Basically, foreign investors who want to invest for short term gains without getting themselves registered at SEBI, do so through FIIs, which are registered bodies with the market regulator. These FIIs issue Participatory Notes or PNs to them, the only way through which these FIIs can invest in India. Since these PNs mainly deal in dollars, a huge amount of dollar comes in. In order to keep the exchange rate stable and dole out excess dollar, RBI buys it from the market. But the process lands up having excess rupee than required in the capital markets. This excess supply without demand decreases rupee value, which eventually raises inflation, a common instance that we all encountered this year! So it becomes a Catch 22 situation, where either way lies the defeat for the country’s finances.

SEBI tried to control them by putting a limit on the investments through PNs, recently, which even proved conducive to quite a large extent. But a better way to preclude the excessive moolah from pooling in the market, could be taxing the capital gains. RBI did something similar to control the excess External Commercial Borrowings (ECB) by proposing a sterilisation tax, which was supported by many analysts too. Director, Crisil, Dharmakirti Joshi told B&E, “ECBs are a major source of such capital inflows and in order to moderate these ECB flows, RBI has proposed a sterilisation tax.” Nonetheless, levying taxes has its own pros & cons, but this might just inhibit FIIs from wrecking further havoc in Indian markets.

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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