The finance ministry is not in favour of curbing inflows from foreign institutional investors (FII) in the Indian stock market at this juncture as it could impact the prospects of the proposed disinvestment of shares in public sector companies, including the initial public offering (IPO) of Coal India Ltd (CIL) through which the government plans to raise Rs 15,400 crore.
A senior finance ministry official said the government is keeping a close watch on FII inflows, which have already touched a record $22 billion during the current year compared to $17 billion during the entire 2009 calendar year.
"However, since the Indian stock market has the capacity to absorb these funds there is no reason for alarm at this point," he explained.
The Coal India IPO will be followed by public offerings of other blue-chip public sector undertakings (PSUs), such as Indian Oil Corp (IOC), Oil and Natural Gas Corp (ONGC) and Hindustan Copper.
"While the Indian stock market is getting global, the funds being raised by companies such as CIL will also be invested overseas in countries like Australia and Africa. This adds an element of depth and stability to these investments," the official said.
A TOUCH AND GO AFFAIR
- Govt keeping an eye on FII inflows which have touched a record $22 bn this year
- Sharp rise in FII inflows has pushed the Sensex past the 20,000-points mark
- Booming bourses will help the govt raise funds to meet investment plans of PSUs and help control fiscal deficit
- Curbing foreign investments would lead to decline in the inflow of foreign funds, resulting in lower stock prices and lower realisations from disinvestment in PSUs
- There has been concern that strong foreign fund inflows have led to a rise in the value of the rupee hitting exporters' earnings
- RBI had intervened last week to buy dollars in the forex mkt to bring down the value of rupee
- Since more dollars will be needed to fund India's widening trade deficit the value of the rupee will not spiral out of control vis--vis the dollar
The sharp increase in FII flows to the Indian stock market has pushed the benchmark Sensex past the 20,000-points mark and it is now hovering close to peak levels that prevailed before the global meltdown of 2008.
A booming stock market will help the government raise more funds to meet the investment plans of public sector enterprises and help control the fiscal deficit as well.
Any curbs on foreign investments inflows would lead to a decline in the inflow of foreign funds, which in turn would result in lower stock prices and lower realisations from the disinvestment of public sector firms.
There has been some concern over the fact that strong foreign fund inflows have led to an increase in the value of the rupee with the exchange rate touching a 25-month high of around Rs 44 against the US dollar.
Exporters have been complaining that this has hit their earnings as their exports are valued in dollars and they get fewer rupees in return for the exported merchandise and services.
After touching a monthly growth of about 36 per cent in April this fiscal, the export expansion slowed to 22.5 per cent in August as the recovery in the US and European markets remains fragile.
The Reserve Bank of India (RBI) had intervened last week to buy dollars in the foreign exchange market to bring down the value of the rupee.
But there is a limit to the extent to which RBI can pump in rupees to buy dollars as this adds liquidity to the system at a time when the central bank wants to tighten money supply to rein in inflation.
However, finance ministry officials said that since more dollars will be required to finance the country's widening trade deficit the value of the rupee is not expected to spiral out of control vis--vis the US currency.
According to figures released by the commerce ministry, the trade deficit for April- August 2010 was $ 56.62 billion, which was higher than $40.27 billion in April-August, 2009.Courtesy: Mail Today