Foreign Capital In The Stock Market
Ila Patnaik, writing in the Indian Express sheds some light on why foreign capital is rushing into the country:
We must see the issue in the context of the yuan revaluation. The 12 days prior to the Chinese announcement had average net daily equity flows into India of Rs 330 crore. The 12 days after the announcement have averaged Rs 536 crore. India is not the only country that has witnessed bigger inflows of foreign capital. It is reported that in the past one month, foreign investors have put in $6 billion in Asia’s stock markets. Taiwan, South Korea, Thailand, Indonesia and the Philippines — which report data on foreign trading — witnessed a sharp increase in inflows. Markets such as Hong Kong, Singapore and Malaysia — which do not report foreign trading data — are also said to be seeing big inflows.
The rationale of foreign investors is as follows. Either the currency of these Asian countries, including India’s, will appreciate with the yuan, thus making it profitable for them to bring US dollars into India now and take money out when there is a currency appreciation. Or, if the domestic currency does not appreciate, India’s exports will become more competitive with respect to China, Indian companies will do well, stock prices will rise giving the foreign investors a profit. To the extent this logic holds, equity purchases by foreign investors are a bit of a one-way bet.
While the government’s reflexive reaction might well be “to make the stock market less accessible to foreigners”, Patnaik suggests just the opposite. Read her full argument here. Her conclusion is:
The policy of making entry into Indian markets difficult favours incumbent FII. It creates new business opportunities for those already registered in the market. It is in India’s interest to have a level playing field between all investors in the world, and to not concentrate the financial capital of global investors into a handful of FIIs. Narrowing the ranks of FIIs strengthens them, while hurting smaller investors abroad. It reduces liquidity and makes regulation more difficult.
Though FI is broadly good, and I completely agree that our regulatory bodies should not put impediments where none is necessary….It might help to curb hot money, which does not benefit anyone save the FI investing. It unusually increases the volatility of the markets, and someone with 1-2bn of hot money can rock the markets over a period of time (rock…as in shake it up….not ‘rock’).
Comment by Amitabh Iyer — August 18, 2005 @ 12:55 am