Importance of foreign investments in India

Recently crowned as World’s 3^rd largest economy by the Organisation for Economic Cooperation and Development (OECD), is the Indian economy already trembling?

The financial crisis in global markets has made the outlook of Indian economy grim. While the consistently volatile markets and the rupee plunging to an all-time low against the USD are some major concern at this moment, natural calamities and economic scandals seem to be the icing on the cake. Two decades ago, in the early 90’s, India faced a similar crisis. At that time India’s major concerns were the problem in balance of payments and poor foreign exchange reserves.

During the crisis, Dr. Manmohan Singh, the Finance Minister of India at that time, came up with a solution to reform the Indian economy. He liberalized the economy by ending the license raj and gave rise to the phenomena of foreign investments in India. Thus, opening the gates for foreign players to come and invest in India.

*License Raj: A term used to describe the regulation of the private sector in India between 1947 and the early 1990s. In India at that time, one needed the approval of numerous agencies in order to set up a business legally.

Since then, foreign investments have been the backbone of the Indian economy and like the 90’s this time too, it would seem that foreign investments might be holding the magic wand that may be able to pull India out of the current economic slump.

Foreign investments are flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. There are two types of foreign investments that play a major role in the growth of Indian economy; Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII).

FDI Inflows into India
*Data from Financial Year 2000-01 to 2012-13 (up to January 2013) Source data: Website of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India

FDI

Foreign Direct Investments (FDI) is investment of foreign assets into domestic structures, equipment, and organizations. FDI inflows are into the primary market and do not include foreign investments into the stock markets. It is a long-term investment and is used by the developing countries as a source of their economic development, productivity growth, to improve the balance of payments and employment generation. Its aim is to increase the productivity by utilizing the resources to their maximum efficiency. Exit is relatively difficult in this phenomenon.

FII

Foreign Institutional Investments (FII) denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. It is generally a short term investment and invests only in the financial assets. FII inflows are only into the secondary market with an aim to increase the capital inflows. Exit is relatively easier in FII.

While both the type of foreign investments are important for India but for a long term economic growth, Indian government should focus on FDI as compared to FII. As it has been proved that due to low exit barriers in FII, the foreign investors can exit from the Indian market whenever they want resulting in a crash in the Indian stock markets.

This calendar year as of (May - 2013) (source: PTI) India had received an FII inflow of more than $ 15 bn and the FII outflow for the month of June and July had already crossed $ 10 bn, resulting in an uncertainty in the markets. This clearly shows that FII inflows are not sustainable and can be redeemed anytime according to the will of the FIIs and the situations prevalent in their home countries.

So to prevent this uncertainty, it becomes necessary that the foreign money which comes to India should stay here for an adequate time, so that this money could help to promote economic and industrial development. This can only be achieved if the money comes via FDI route.

The Foreign-direct investments were seen sliding about 21% last fiscal. This is despite, the government passing a law in September 2012, allowing big retailers to open stores directly, yet none of the foreign dream-merchants have really taken the bet. Reasons being too many prerequisites, constraints on whom goods can be purchased from, a raft of regulations limiting franchise models and factory construction, and the infuriating need to negotiate separately with each of the states.

However the recent announcements by the government of India on 100% FDI in telecom & defence sector, 100% FDI in single brand retail & 51% FDI in multi brand retail and 49% FDI in Insurance give us some ray of hope for the economic development.

Moreover though this could be temporary slowdown or reversals in FII and FDI inflows based on interest rate cycles, flow of funds, global contagion etc, over the long term, given the nascence of many Indian businesses, the growth potential and 1.2 billion people pining for a taste of globalization, one could expect a kick-start of inflows in near future. 

The dip and dive of the Rupee and the Sensex

The Sensex fell by approx. 770 points on Friday the 16^th of August, 2013 and another 290.66 points, today the 19^th of August, 2013. That is a fall of more than 1000 points in two working days.
The Rupee hit rock bottom at 62.70 today, at the time of writing this article and seems to be finding new levels to fall to at almost every trading session.
Quite a few reasons have been cited for the fall in the Rupee and the Sensex. Another set of rumours seem to have emerged from the US, with the Fed considering, yet again, a cut in Quantitative Easing or QE. The US is the largest economy in the world and has business interests in almost all countries across the globe. The dollar is one of the world's dominant reserve currencies; several countries use it as their official currency, and in many others it is the de facto currency, therefore any changes in policy in the US will be felt in financial markets across the globe. Especially in emerging markets like India where there is substantial investment of private American companies.
A cut in the QE would mean that the flood of easy FII money that has been coming into the system will reduce to a trickle or stop altogether. Based on this sentiment the markets and the rupee have fallen.
Sounds pretty cut and dry doesn't it? FII's withdraw money, so obviously the markets are going to fall sharply, as is the rupee. Dig a little deeper and you will see the reason for worry.
FII participation has increased from approximately USD 6 billion in CY 2003 to approximately USD 24 billion in CY 2012, in Indian stock markets. A glance at the table below will show you that Retail participation has subsequently fallen. The assumption being that inflows into equity mutual funds are inflows mobilized from the public and has very little corporate money, so when we do see a cumulative growth of 2.3 Billion, it is not even a blip on the 110 billion of FII money that has come in.
Healthy retail participation in stock markets not only insulates the market against global shocks like these but also indicates the faith that the common man has in the companies which operate in his country and make up the stock market. It would seem from these numbers that the common man has less confidence in equities does not want to put his savings into equity markets. The powers-that-be face an uphill task of restoring the confidence of the investor in the markets, else a slight tremor in any major economy across the world, will result in a landslide in Indian markets and currency.

Past performance may or may not be sustained in future

Source: Sebi.gov.in

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The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

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Buy L&T on dip, Reliance may fall further: Anu Jain

Anu Jain, Director - Equities at IIFL Private Wealth Management told CNBC-TV18, " Reliance Industries  to be the one which can fall more if the markets were to give up from here. It has held on to those Rs 840-845 levels and broken down that, closed at Rs 825 on Friday. Now that Rs 795-800 levels is a support zone for it."

"If the markets were to stay weak and it were to test those levels and break that then you would have a fall which could take it right down to about the previous lows and may be slightly lower. Till now it was an outperformer," she said.

Jain further said, "The strong support is at Rs 795. It is definitely possible for that Rs 30 which is about 3.5 percent from here to go off on a day like this or may be one more day. It is Rs 795, which is crucial as to how it holds up, the next level would be Rs 770."

"On the other hand at about Rs 750, Larsen and Toubro  (L&T) is looking extremely oversold. I think you can get it down up to Rs 730, but those would be levels to accumulate. So given further short call even if the market was to go weak on L&T seems to be unlikely. The lower levels will be levels to accumulate L&T even though the whole sector is negative. So Reliance may give up, L&T should be a buying opportunity on lower levels," she said.