By attracting dollars, this move could help steady the rupee and keep India away from a balance-of- payments crisis
In the year gone by, global economic turbulence, exacerbated by the Eurozone crisis, made a mockery of the idea of ‘decoupling’: that India was safe from the rest of the world’s woes. The BSE Sensex lost about a quarter of its value and the rupee touched a record low, even as high interest rates slowed India’s growth and the Government’s attempt at retail reforms came unstuck. So, when, on the very first day of 2012, the Government made a show of its reformist zeal by allowing foreigners to directly invest in Indian stockmarkets, it was welcomed by investors. “Though it is an act of desperation,” says Piyush Shah, a finance expert at KPMG, “it is a positive step towards capital account convertibility, a situation where foreign exchange freely flows in and out of the country.”
Now that Indian equities can be bought by foreign individuals and funds (such as pension funds that invest for the long term) that are deemed ‘qualified’, perhaps stockmarket volatility will reduce. By attracting dollars, this move could also help steady the rupee and keep India away from a balance-of-payments crisis. “Foreigners could invest in India-linked exchange traded funds listed in London or New York,” says Mukul Pal, co-founder of Orpheus Capital, “This policy change may be an attempt to bring that volume back and reduce bottlenecks.”
What it effectively means is that the opinion of foreign institutional investors (FIIs), which collectively pulled big sums out of Indian shares last year, need not get in the way of individual investment plans. “Rather than depending on the wisdom of FIIs, this move allows foreigners to participate directly in the Indian growth story,” says Vivek Sharma, executive director, Ernst & Young.
By some jolly coincidence, with prices beaten down, Indian stock valuations are looking attractive right now. ‘Dividend yields’ of some firms could even touch high single-digits if the economy regains its 8-9 per cent growth trajectory. Until there are clear signs of that, however, there might not be too much foreign money raring to rush into Indian shares. “The money can come in big spurts,” says Sharma, “but only if Indian markets perform better than in 2011 and show bullishness over the medium term.”