The rupee went down recently and one of the reasons for that is that FIIs have turned net sellers again. But there isn’t any sense of crisis in the foreign exchange market. Neither is there much evidence of massive RBI intervention. As the Economics with FE research piece published in today’s newspaper shows, RBI has been moderate in its activity and low foreign exchange outgoes in terms of lower commodity (oil included) import bills have helped. It’s too early to say that the foreign exchange market has matured in India. But there are good signs. Also note that rupee depreciation isn’t changing the inflation game—global prices are too low for that to happen. The behaviour of FIIs is interesting. They were net sellers from May (before the global crisis hit full force) to November 2008(the month when the impact was felt the hardest). They then turned net buyers of equity (Rs 1,319.4 crore) in December last year on positive cues from the market. Then, lacklustre corporate results, the Satyam fraud, declining industrial production and dampened consumer demand spooked FIIs a bit. Equities worth Rs 32,924.4 crore were sold in January this year. So far in February, the trend is the same. The good flip side is that recent selling by FIIs has produced low valuations and therefore attractive investment opportunities for long-term retail and domestic institutional investors.
Other sources of foreign capital aren’t doing too well, either. On the external commercial borrowings front, latest available data shows that for the period April to December, 2008, ECBs declined by 35.74% on year-on-year comparison; from $21.45 billionto $13.78 billion. Also, despite the hike in the interest rate ceiling on non-resident deposits, growth in these deposits has failed to pick up. There are also some fears of a fall in NRI remittances. The past few months saw high remittances from the Middle East. But reports of jobs losses and wage cuts in the region mean there will be less inflow. So, capital inflows remain a challenge and in that context it would be interesting to see whether new FDI relaxations bring in more funds. The positive side, as mentioned before, is that cheap imports are balancing out things a bit and they also represent low-cost investment options in infrastructure projects. The government seems serious about infrastructure. Somewhat perversely, there’s no better time than now—remember the boom times when one couldn’t find cranes?