-
7/31/2019 By Mr.devendra Nevgi
1/14
Devendra Nevgi, Quantum AMC
FII flows and India
Devendra Nevgi
CEO & CIO, Quantum AMC
19th October 2007, Dun & Bradsheet
-
7/31/2019 By Mr.devendra Nevgi
2/14
Devendra Nevgi, Quantum AMC
The Background
India The 1991 Foreign exchange crisis,Foreign exchange reserves at USD 5.8 bn
India-Ship gold to BOE to secure a loanrepayment of only USD 457 mn
Easiest way to resolve the crisis was Magic
Wand of reforms and opening up of capitalmarkets for FIIs especially Participatory Notesand non FDI flows
Asian crisis in 1997/98-Foreign exchangereserve accumulation
9/11, Accommodative US monetary policy.
-
7/31/2019 By Mr.devendra Nevgi
3/14
Devendra Nevgi, Quantum AMC
The Pull factors
Domestic Pull factors-Reforms,strongeco
fundamentals, Higher Interest Rates, goodvaluations, market liquidity, size, low trading cost,information dissemination
External Push factors: Global liquidity, lower interestrates, higher risk appetite, lower relative growth
-
7/31/2019 By Mr.devendra Nevgi
4/14
Devendra Nevgi, Quantum AMC
The flood of Capital Flows
Cum Flows At cost ( USD bn)
65
60
4843
0
10
20
30
40
50
60
70
FII Net FDI ECB NRI
28%
-
7/31/2019 By Mr.devendra Nevgi
5/14
Devendra Nevgi, Quantum AMC
FIIs Pull
-
7/31/2019 By Mr.devendra Nevgi
6/14
Devendra Nevgi, Quantum AMC
Capital Flows & Real Economy
Capital flows
Households
Money supply
Exchange Rate
FX reserves
Consumption
Interest Rates
Savings &
Investments
Asset Prices
-
7/31/2019 By Mr.devendra Nevgi
7/14
Devendra Nevgi, Quantum AMC
FII & the financial system
-
7/31/2019 By Mr.devendra Nevgi
8/14
Devendra Nevgi, Quantum AMC
Foreign flows Virtuous Cycle
-
7/31/2019 By Mr.devendra Nevgi
9/14
Devendra Nevgi, Quantum AMC
Importance of FIIs
Market Value $250 bn 25% of GDP and 20% oftotal market cap
Close to USD 100 bn is estimated in PNs
Turnover (cash) share 31% ; MFs 10%
BSE 500 22% share in market cap
MF to FII holdings ratio 1:5
RBI Fx assets 26% - 28% of M3 (money supply)
Co relation to developed market more than 0.50.
FII flows and INR correlation 87%
Current account deficit converted into capital accountsurplus
-
7/31/2019 By Mr.devendra Nevgi
10/14
Devendra Nevgi, Quantum AMC
Benefits of FII flows
Lowers cost of capital, access to cheap global credit
Supplements domestic savings and investments Capital markets reforms and financial sector
development
Higher asset prices
Spurs domestic reforms
-
7/31/2019 By Mr.devendra Nevgi
11/14
Devendra Nevgi, Quantum AMC
The impossible trinity
Managed exchange rate, semi fixed
Liberalized capital account
Independent monetary policy
RBI has bought almost USD 50 bn since April 2006, INR +12.50 % YTD
-
10 ,00 0
2 0 , 0 0 0
3 0 , 0 0 0
4 0 , 0 0 0
50 ,000
6 0 , 0 0 0
-
7/31/2019 By Mr.devendra Nevgi
12/14
Devendra Nevgi, Quantum AMC
Issues & Problems-Reversals
Inflation & Asset Bubbles,
Largest Credit Consumption cycle in India funded by
FII flows-Reversal ? Real economy Impact-Currency, Interest rates, Bad
Credit, Stock Markets-Negative Wealth effects
P notes-Sudden Reversals,Overshooting,Multilayering, Herding
Disorderly adjustments of imbalances-Financialinstability
High CAD/Fiscal Defecit,Public Debt, Inflationarytendency, Crude Oil
-
7/31/2019 By Mr.devendra Nevgi
13/14
Devendra Nevgi, Quantum AMC
What can be done ?
Benefits of Global flows v/s the cost of instability.
Improve the supply response or the absorptivecapacity of the economy.
Strong macro economic policy/reform framework
Strong regulatory framework, Corporate Governance
Strengthening the financial & banking system
Developing & deepening the currency & moneymarkets
Allow INR to appreciate
-
7/31/2019 By Mr.devendra Nevgi
14/14
Devendra Nevgi, Quantum AMC
Thank You for your patience
