ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Foreign Portfolio Investment Rush

Where is the current foreign portfolio investment rush leading the Indian economy to?

The recent surge in foreign portfolio investment (FPI) in debt instruments, particularly in government debt, seems to have led the Governor of the Reserve Bank of India (RBI), Raghuram Rajan, to think of applying the brakes. In an address as the chief guest at the 55th foundation day celebrations of Somaiya College, Mumbai, on 16 September, Rajan is reported to have said that “we are limiting our reliance on foreign debt. It is important that we keep it this way and manage the economy in a way that is careful and that is circumspect.” As of 23 September, as we go to press, the RBI’s upper cap on investment in government debt at the auctions, $25 billion, has almost been reached. Of course, FPI in government debt on tap and in corporate debt are not at all that close to their respective upper caps, but the question arises as to whether the RBI will, like it has consistently done in the past, enhance the upper caps in line with the greater demand for these securities/bonds from foreign portfolio investors.

A quick glance at the annual data on FPI since 1996-97 – when such investment in debt instruments were added to the already vigorous investment in equity capital – shows that the share of FPI in debt instruments as a proportion of total FPI has been on an (more-or-less) upward trend since 2007, more so in the wake of the great financial crisis. As is well known, the Federal Reserve’s (the Fed) easy monetary policy at first brought down short-term interest rates. But even as these rates remained close to zero, the economy showed little or no response, and so “quantitative easing” was resorted to. This raised the price of the bonds and thereby sought to drive down long-term interest rates. The banks naturally sold the government bonds in their kitty to the Fed at the higher prices on offer, took the money, and used it, in the near absence of other investment opportunities, to further speculate in the financial markets. A part of this money has been “invested” in the emerging markets, including the Indian, to reap high rates of return, of course, weighted for risk, and thus in an appropriate portfolio of equity and debt instruments.

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here


To gain instant access to this article (download).

Pay INR 50.00

(Readers in India)

Pay $ 6.00

(Readers outside India)

Back to Top