Good policing by RBI in India- to check fair weather friends

Foreign institutional investors (FII) are the type of gamblers who not just gamble with their own money but also with that of others.  Commonly they seek entry under the garb of Foreign Institutional Investors (FIIs) or bring in their money via P Notes.  These FIIs have a notorious history of bringing in speculative capital.  Only a handful of them have an eye for long term investments.

The India central bank has had a tough time dealing with them over the past two decades.  This is ever since the market opened up to foreign capital.  The FIIs brought in US$ 7 bn in FY91.  This gradually went up to US$ 107 bn during FY08, the year just before the subprime crisis.  Again it dropped to as low as US$ 7 bn in FY09 at the height of the crisis.  And once again, capital inflows to the tune of US$ 50 bn in FY10 have raised the RBI’s concerns.

But the Indian central bank is at its proactive best.  The RBI governor has not minced words in citing his disapproval of ‘fair-weather’ FII money.  In a recent speech at an international forum, Dr Subbaro quoted few lines from a recent issue of The Economist.  “Capital, like water, tends to flow around obstacles. Try to dam its movements at one point, and slowly but remorselessly, it will find its way around. To learn to ‘dam’ the flows so that the benefits of capital flows exceed their costs remains an intellectual and policy challenge for EMEs.” The RBI therefore has its eyes set only on long term capital inflows.

At the recent Equitymaster Investment Summit, our founder Ajit Dayal also aired similar views on P-notes. Calling them ‘terrible for the economy’, Ajit reasoned that such funds do not help in building roads and houses or getting jobs for billions of people. The FIIs have got their own problems. They re-price and reassess their risk every single day. And that’s what causes these wild swings in the Indian stock market. We are lucky to at least have a central bank with good foresight.

5 minute wrap-Equity master dt 12.5.2010


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