Modulate FII inflows to stem rupee appreciation

PHD Chamber has called for fine tuning the policy relating to Foreign Institutional Investors (FIIs) to insulate the economy from extreme speculative swings and concomitant distortions in the economy.

This radical suggestion of the Chamber has come at a time, when FIIs exposures in the country has reached high proportions and the perceived view that such inflows are causing, to a very great extent, rupee appreciation against major currencies, particularly the greenback.

"We are not against FII inflow into the country, which is a barometer of the degree of maturity of the economy. But when there is a huge jump - US$22bn during April-November 2007 as against US$3.8bn in the corresponding period last year-we have to sit up and take stock of the situation. Such an exercise is not meant for putting stumbling blocs on the inflow but to gauge the quality of inflows to discern how much has been channelized to productive sectors," says Dr L K Malhotra, President, PHD Chamber.

According to PHD Chamber three pivotal segments of the industry-textiles, information technology and gems and jewellery -are reeling under heavy pressure on account of rupee appreciation since these industries’ fortunes are directly linked to exports.

Soon the negative spin-offs of the rupee appreciation would affect other segments as well. The common perception that rupee appreciation would lead to easing of cost of imports and help the domestic industry is an overstated fact in the long run. A holistic view has to be taken in such circumstances. Weak dollar or Euro would lead to surge in imports of goods at reduced prices, which can erode the price competitiveness of the domestic industry.

Dr Malhotra said that the Chamber has catalogued a few case studies, where the project reports for the Greenfield projects have gone haywire on account of the rupee appreciation. These projects were drawn up on the basis of a stable or slightly appreciating rupee.

"But on the ground, we are having a steadily appreciating rupee, a higher interest rate regime and a plethora of infrastructure bottlenecks, which can square off the marginal benefits on imports on account of rupee appreciation and can erode the price competitiveness of the goods in the domestic market," says Dr Malhotra.

PHD Chamber feels that the perceived looming recession in the US and slowdown in the growth rates in the manufacturing sectors in Europe coupled with recent steps that are taken or are being contemplated by these countries to curb the hedge funds’ operation in the aftermath of sub prime mortgage crisis in US, would compel many FIIs to park their funds in India for a safe return. This might lead to further firming up of rupee.

The Chamber feels that there are ways in which the FII flows into the country can be modulated, without pressing the panic button. These include a minimum lock in period, say for one year and more imaginative policies to check the inflow through Participatory Note (PN) route. "The recent high level meeting called by SEBI has discussed these issues threadbare and some positive decisions should be put in place as early as possible," adds Dr Malhotra.

PHD Chamber said that there is a worldwide consensus for modulating the capital flows. European countries are inclined towards imposition of additional taxes for capital flows and compulsory registration of hedge funds. Some Governments have already imposed the additional taxes-known as Tobin Tax, (named after Robert Tobin who propounded the tax). "India also has to think in that direction, sooner or later," says Dr Malhotra.