MUMBAI: Foreign direct investment (FDI) inflows could help curb any volatility in the Indian currency market when the likely tightening in US interest rates next year makes dollar-based assets more attractive to bulge-bracket overseas banks and funds.
Sustained FDI inflows should help offset sudden exits by foreign portfolio investors, which normally track global financing costs while making short-term investment decisions. Capital flight triggered by rate changes often drive down emerging-market currencies.
“If FDI flows continue to grow, it is definitely a welcome change at least for the currency market,” said Bhaskar Panda, senior VP, treasury, HDFC BankBSE 0.05 %. “Such moves help curb the rupee-dollar volatility in the long run amid global uncertainties.”
India’s FDI flows increased 17% to $25.35 billion between April and September this fiscal, according to the department of industrial policy and promotion (DIPP). It was at $21.6 billion in the corresponding period last year.
Services, telecom, automobile, trading, computer hardware, and software led the investment flows.
“FDI inflows are likely to rise, with the government focusing more on the Make-In-India campaign,” said Anindya Banerjee, a currency analyst at Kotak Securities. “This could be instrumental in the rupee's rise against the dollar. Investors are also betting big on Gujarat elections as the ruling party's win is seen as a prelude to more overseas investment in large plants.”
In the past two days the rupee gained 29 paise, or about half a per cent. It closed at 64.41 a dollar on Tuesday, the strongest level since September 20.
In comparison with foreign portfolio investments, FDI is seen as a more stable source of overseas cash.
"We are not bullish on the dollar in the long run,” said Abhishek Goenka, founder and CEO of IFA Global, a Mumbai-based forex firm. “We are advising our exporting clients to book (dollar-rupee) three to 12 month forwards contracts.”
More than a week ago, an ET poll suggested that the Indian rupee may appreciate by as much as 3.1% by March.
Source: economictimes.indiatimes.com