Daily Current Affairs 2020 Managing the huge inflow of foreign funds | Daily Current Affairs 2020

Managing the huge inflow of foreign funds

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Global ‘hot’ money seems to be making its way into the Indian securities market, posing both an inflation and asset bubble creation risk, besides forcing the RBI to buy dollars frantically to keep the Indian rupee from sudden appreciation. Last month, India saw foreign funds pumping in an unprecedented $8.1 billion into its bourses, the highest in a single month since the aftermath of the Wall Street crash.

This huge inflow pushed the Sensex up by more than 10% in November. It seems some of the $11 trillion given out as stimulus by G20 countries to beat the Covid-induced economic blues is slowly making its way to markets like India after swirling through global financial channels.

Without the RBI buying dollars through the State Bank of India, the Indian rupee may well have appreciated far more than it has. From Rs 77.33 on March 24 when India went into lockdown to combat the pandemic, the rupee has appreciated to about Rs 73.85. This has happened as India’s forex reserves have swelled by an unprecedented $101 billion since March.

However, aggressively buying dollars releases more rupees into the Indian marketplace, pushing up an already heightened inflation rate. The other problem with this is that there is a limit to the amount of dollars the RBI can buy in the face of a deluge. At the same time, the problem with such surges of short-term forex inflows is that they can as easily move away as they came in, puncturing the asset bubbles they helped create, causing sudden deflation and worse, sudden depreciation of the local currency.  

There are no easy fixes to this problem. The government and market regulators can take steps to temporarily limit holdings by individual funds, but such moves are sure to be resisted by markets as draconian.

The RBI can and will certainly continue with its open market operations—selling treasury bills—to reduce liquidity in the market with the aim of keeping a lid on inflation. However, such measures too have their limitations. It seems asset bubbles and currency appreciation will still remain a risk in the year to come.

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