Why Sebi's simpler foreign investment rules will not save rupee

The Securities & Exchange Board of India (Sebi) move to simplify norms for foreign investments is a positive step to bring in much-needed clarity in such investments. However, the move, which has its genesis in Finance Minister Palaniappan Chidambaram's Budget 2013, is hardly expected to make a dramatic impact in terms of bringing in greater foreign portfolio investments and easing the pressure on the rupee.

On 25 June, the Sebi board cleared a slew of moves to simplify the norms for foreign investments, both in terms of easing registration procedures and simplifying the categories foreign investments are clubbed under. In a bid to make things simple, the category of foreign portfolio investor has been created, which essentially means any foreign investment under 10 percent equity will be governed by these regulations, and anything above the 10 percent mark would come under the foreign direct investment (FDI) norms. Chidambaram's Budget had made it clear that the regime would be simplified for foreign portfolio flows in these lines.

 Why Sebis simpler foreign investment rules will not save rupee

AFP

However, these steps, which are essentially procedural simplifications, will have little bearing on the quantum of flows from foreign investors. FIIs are essentially looking at the broader macro picture, the twin deficits, governance signals emanating out of New Delhi and risks to macro stability.

In a recent report on the rupee's movements, titled 'Keep Calm and Carry On', Kotak Mahindra Bank says: "The steadily gaining rhetoric of Fed gradually tapering off its asset purchase is likely to guarantee dollar strength (as relatively the Euro region fundamentals also stay poor). With lower amount of dollar liquidity at play, emerging market currencies will bear the brunt via a sell-off in the bond market." Given the extent of fall in the rupee over the past few weeks, the bank has revised its average USD/INR in FY2014E to 57.56 from the earlier estimate of 56, "recognizing the difficulty that might be faced in bridging the current account deficit (CAD) through volatile capital flows."

India, while being hostage to the dollar strength, has its share of domestic challenges that is likely to keep the rupee on a weakening bias, the report adds, saying that the usual suspects of twin deficits, inflation risks and need for long-term solutions to revive growth are now being subject to the risk of capital inflows due to the shrinking global dollar flows. "While there could still be a pull-back in the rupee towards the 58 mark due to (1) expectations of flows (HUL, Bharti deals) and (2) corrections to the exaggerated reaction in the global markets, the sustainability of the same remains an issue," it says. The most significant and visible effect of this rupee move, the bank says, will be on the fiscal with the direct impact of crude under recovery showing up on the subsidy front.

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Updated Date: Dec 20, 2014 19:47:39 IST