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Will Fiis Continue To Bet On India?: Essay-Role of Fdi & Fii in Indian Economy
Will Fiis Continue To Bet On India?: Essay-Role of Fdi & Fii in Indian Economy
India?
With domestic equity markets signing off August on a high, investors
are speculating whether foreign institutional investors will show the
same interest in September too.
FDI occurs when an entity or investor from one country obtainS the controlling interest in
an entity in another country and then operates and manages the entity and its assets as part of
the multinational business of the investing entity.
FII: foreign institutional investor its category of investment instrument that are more easily
traded , may be less permanent , and do not represent a controlling stake in an enterprise , these
include investment via equity instrument or debt of a foreign enterprise which does not
necessarily represents a long term interest.
FIIleadstoappreciationofthecurrency:FIIneedtomaintainanaccountwithRBIfroall
transaction.tounderstandtheimplicationofFIIontheexchangeratewehavetounderstandhowthevalue
ofonecurrencyappreciateordepreciateagainsttheothercurrency
FIIandexports:
ifourIndiancurrencyappreciatesjustbecauseofFII(netinflowinIndia)thereis
adverseeffectonourexport.Ourexportindustrywillbecomeuncompetitiveduetoappreciationofrupees.
FIIandstockmarket:whencaponFIIishighthentheycanbringinlotoffundsincountrystock
market.
FIIandinflation:thehugeamountofFIIfundflowcreatesthehugedemandforIndianrupees.In
thatsituationRBIprintmoremoneyinthemarket.thissituationcouldleadtoexcessliquiditythereby
leadingtoinflation.
Createsemploymentopportunityfordomesticcountry.
Goodrelationbetweentwocountries.
InflowofforeignfundsinIndianeconomy.
ItcreatesthecompetitionamongthedomesticcompanyandMNCinthiswaydomesticcocan
increasetheirefficiency.
CreatinggoodcapitalmarketinIndia.
Governmentearnsintheformoflicensesfees,registrationfees,taxeswhichisspendforpublic
expenditure.
Thus we can clearly observe that FDI & FII play a vital role in the Indian
Economy.
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INR. This is just because of FII was net buyer (FII inflow was more in Indian market ) but now
you will see 1 USD = 48 INR . This is because of FII out flow from Indian market is more and
they are net seller.
This FII inflow makes the currency of the country invested in appreciate. (E.g. FII investing in
India may lead to rupees appreciating over other currencies) and their selling and disinvestment
may lead to depreciation.
2.FII and exports: if our Indian currency appreciates just because of FII (net inflow in India) there
is adverse effect on our export. Our export industry will become uncompetitive due to
appreciation of rupees.
E.g. if USD = INR 40 and a soap costs 1 USD. Now when the rupees appreciated 1 USD = 20
inr , I will have to sell the same soap to the US for 2 USD in order to sustain the same income
that I have been making i.e. 40 INR.
Logic is very simple. First I sold my soap at INR which was equal to one USD. But after
appreciation I would like to sell 2 USD to get my same income that means I will charge more US
dollar from USA customer. So if we charge high price of course customer will be less.
The excess FII fund inflow in the country can also make a negative impact on the economy of
the country.
In this situation our Indian IT industries, jewelry and textiles industry affect. However you have
seen at the appreciation time government give them some package specially for this category.
3.FII and stock market: when cap on FII is high then they can bring in lot of funds in country
stock market and thus have great influence on the way the stock market behaves, going up or
down. The FII buying pushes the stock up and heir selling shows the stock market down.
4.FII and inflation: the huge amount of FII fund flow creates the huge demand for Indian rupees.
In that situation RBI print more money in the market. this situation could lead to excess liquidity
therby leading to inflation , where too much money chase too few goods and service ( perfect
example of demand pull inflation)
Thus there should be a limit to the FII inflow in the country.
5.FII and local companies: when huge FII comes in any country there is much availability of fund
for local company in this time local co. Can expand their coverage. `
6.Capital formation in domestic market: if there is much FII inflow in the country will not borrow
from other country or from international bank. If home countrys saving rate are not sufficient to
meet its investment programmed but if FII inflow is well there is no problem. India is developing
country and its domestic saving is low compared to developed countries. So here is need for FII
inflow.
5.ECONOMIC GROWTH: of course FII will invest in those countries which are growing at fast
rate like India, china and Korea.
FDI
FDI : FDI come from MNCs and corporate so as to derive benefit of new market , cheaper
resource , efficiency and skill etc
FII: FII come from investor, mutual fund company, portfolio management and corporate with
pure motive of investment gains.
form :
FDI : FDI generally comes as subsidiary company or joint venture
FII:It comes through stock market
Regulator body :
FDI : RBI , ministry of finance and FIPB( foreign investment promotion board )
FII: SEBI ( security exchange board of India )
Purpose
FDI : : diversification and expand at global coverage
FII: FII sole criteria and motive is gains on investment
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Disadvantage of FII:::
Problems of Inflation: Huge amounts of FII fund inflow into the country
creates a lot of demand for rupee, and the RBI pumps the amount of
Rupee in the market as a result of demand created.
Problems for small investor: The FIIs profit from investing in emerging
financial stock markets. If the cap on FII is high then they can bring in
huge amounts of funds in the countrys stock markets and thus have great
influence on the way the stock markets behaves, going up or down. The
FII buying pushes the stocks up and their selling shows the stock market
the downward path. This creates problems for the small retail investor,
whose fortunes get driven by the actions of the large FIIs