As US Fed chairman Ben Bernanke resorting to "Greenspan Put" again by cutting the rates by 25 basis points, RBI must be worried about more dollar inflows in the country. RBI can say that it has envisaged the Fed rate cut and hence it hiked the CRR by 50 basis points but this will not solve the problem of increasing foreign capital inflow in the country.
During the last few months, RBI has tried out various options like ECB curbs, Participatory Notes etc but this has not affected the dollar inflows much. Dollar inflows has not only led to rupee appreciation but has also resulted in increasing foreign reserves and money supply (M3) in the economy. At present the money supply (M3) is over 21% which is much higher than the RBI's comfortable limit of 17.0 - 17.5 %. One can expect RBI to introduce some new restrictions on foreign investments or fund raising to curb the liquidity in the economy; and this may happen in the next few days.
Friday, November 2, 2007
Subscribe to:
Post Comments (Atom)
5 comments:
This indeed was an interesting period to observe. As you ended the article anticipating the RBI to make some moves, I recently read something on those lines. The VCs from mauritius earlier would form funds worth a few dollars (some times 1), get approval from SEBI and then get actual funds and invest in the markets. Now there is a move to ensure these guys first get the capital and then get regulation. I feel, the fund investors would not like this and this would lead to reduced inflow through the VC route. What do you think of this?
Indeed this will help controlling the inflow through PE/VC route; however I believe that this will be short lived. Given the returns and investment potential in India, investors may not mind losing some flexibility.
Though far fetched, I believe that if foreign inflows continue in the same manner then RBI may be compelled to put some restrictions on total investment from the registered entities.
I understand your POV. But I think RBI would avert from taking any blanket stand since that would really hurt sentiments. I think RBI would do more of systematic elimination of certain narrow sections one by one over a period so that gradually a large part is avoided rather than getting rid of a large part suddenly. Case in point, the restricition on just VC inflow at the moment. Do you also agree or you feel they could in fact come with a blanket regime? What do you see SEBI's role here? What would they want from this?
I totally agree with you that RBI would refrain from any drastic measure and may come up with a well thought framework to tackle the excess liquidity/inflows.
As far as SEBI is concerned, it is rightly concerned about the identity of the investors (as they claimed while participatory note muddle). They may come up with some sort of incentives to encourage FIIs (and hedge funds in future) to follow the guidelines.
One exciting thought that passed my mind was the confluence of under developed corporate debt market in India and foreign inflows. Commercial borrowing is costly in India (see ECB label in the blog) and if the regulators come up with a framework that may intermediate the commercial bonds and foreign inflows in India then I think that corporate debt market can be developed and also liquidity can be controlled. What are your views on this thought?
I think you have made an excellent point here. India has several domestic investors who need a developed corporate debt market - it is the insurance and ulip players. For asset-liability management, the G-secs are too illiquid in India. But I think a huge problem with India is the huge budget deficit the govt is living with. That puts too many restrictions on the debt markets. Of the total corp debt, bonds are just 5% while rest is private placements. So while your point is brilliant, unless the govt does something drastic to discipline its own debt-taking and debt-appetite, I doubt that the bond market could flourish. Your comments please?
Post a Comment