Economic openness
January 13, 2012
The phones in Sanjay Bahal's busy office in the commercial hub of Connaught Place in Delhi have been busy. As the managing director of a flourishing financial services firm who has been in the stock-broking business for over two decades, he and his dedicated team have been flooded with queries from foreign individual investors keen to take up Indian stocks.
"Till now, Foreign Institutional Investors (FII's) were only allowed to invest in mutual funds. But opening it up further will reduce market volatility and be beneficial in the long run," says Bahl, who has been receiving inquiries from potential investors in the Middle East and a handful of countries in Europe.
The new initiative will apply to Qualified Foreign Investors (QFIs) defined as including individuals, groups or associations, resident in a foreign country and compliant with the Financial Action Task Force - a global body to boost national and international policies to counter terror funding and money laundering.
Tough times for Indian economy
India's stock markets have had a rough ride recently. While the EU debt crisis and lethargic Western economies were factors for a dip in outside investments, domestic factors were also to blame.
With high interest rates, inflation hovering over 9 percent for a good part of last year and the rupee falling to a record low against the US dollar, foreign fund inflows dried up.
Moreover institutional investors - such as pension and investment funds - have been hastily selling Indian company shares, driving the market further down.
"This move by the government may not lead to a surge in foreign capital inflows immediately as Indian equities have not performed well and sentiment is low. But over the medium to long term, it will begin to pay dividends," says economic analyst M.K. Venu.
Will foreigners buy?
In 2011, foreign fund inflows dried up with net outflows of about $400 million (312 million euros), as compared to record inflows of more than $29 billion in 2010 and $19 billion in 2009.
The Alliance for US India Business (AUSIB) which has been instrumental in strengthening bilateral trade efforts between the US and India welcomed the decision.
"India urgently needs FDI and one of the ways is for individuals to invest. There is a lot of interest in the Indian economy and for foreign individuals to invest in this economy. We are happy about the changes to capitalize on this interest," said Sanjay Puri, president of AUSIB.
C.S. Mohapatra, director in the capital markets division of the country's Finance Ministry, told Deutsche Welle there was no need to get pessimistic at the state of the stock exchanges even though indices had fallen by 25 percent in 2011.
"We should not be complacent but must not hesitate in ushering in second generation reforms," he said.
A more resilient economy needed
In his reckoning, despite being a difficult year for Indian equity markets, it was positive to see the Indian government respond with such measures.
But there are others who believe investment by foreign nationals would depend upon the way Indian growth pans out.
Analysts believe that if the annual growth rate gathers momentum, industrial production improves and exchange rate fluctuations balance out, it would bring cheers all round.
Bank balance sheets in India are reasonably robust compared with most banking systems in the world today. And given the country's entrepreneurial spirit, QFIs should be optimistic, adds Sanjay Bahal
Whether the opening of the stock markets to foreign investors ushers in the promise of an Indian Spring for the markets will be keenly watched. The changes come into effect on January 15.
Author: Murali Krishnan
Editor: Darren Mara