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FII Flows and Capital Market
Letters Vasudevan and Chandrasekhar also suspect that the stock price spiral is largely because of surging FII inflows and is not based on the fundamental strength of the Indian economy or the Indian companies. Just as stock prices and FII flows may show high positive correlation, so do FII flows and the expectations about the fundamental strength and prospects of the Indian economy and companies. It is the investors, long-term or speculative, who make judgments about the prospects because they risk their monies and decide which countries and companies they consider better off investing in/disinvesting from. Economists or finance theorists have so far not claimed the right to develop universally acceptable, scientific, quantitative measures of such prospects for use by all investors. If all investors were to arrive at the same judgment at the same time, there would hardly be any stock market. That all FIIs have the same judgment (they buy/sell as a herd) all the time and therefore can be clubbed as one entity for analytical purposes is yet to be established. So, it is not clear why one cannot interpret surging FII inflows as the result of the judgment of a host of investors around the world that Indian economy/ companies have brighter prospects, even if Vasudevan and Chandrasekhar as investors or otherwise may not be so optimistic about the prospects of the Indian economy (even if their judgment turns out to be correct at a future point of time). Vasudevan and Chandrasekhar express their worries about the difficulties that the Reserve Bank of India (RBI) may face in conducting its monetary policy if FII flows surged in the manner they have in the recent period and if, for some reason or other, FII outflows suddenly rise sharply. It would be too embarrassing for a central bank if experts think that the RBI expects to operate in an environment that would always remain congenial to monetary policy. A central bank is expected to find its own solutions to enhance the effectiveness of its policy in the face of foreigners buying and selling domestic financial assets. This is a challenge RBI may love to face. It is good that the Lahiri committee did not feel that it was obliged to argue for protection of RBI and exposed the note of dissent (as part of its report) demanding protection of a congenial environment for RBI’s conduct of monetary policy. Partha Sen correctly emphasises the inadequacy of reference to available empirical evidence and the absence of quality macroeconomic modelling to support the policy prescriptions in the Lahiri committee report (though, like Vasudevan and Chandrasekhar, Sen has his share of speculative conjecture that a FII flow-induced boom in stock market only benefits some rich in posh colonies, while squeezing the tradable goods sector and not positively impacting fixed capital formation). Sen’s suggestions for improvement in quality analytical inputs to policy-making Subscription (Rs) Six One Two Three months year years years Institutions – 1250 2300 3300 Individuals 500 935 1750 2500 Concessional Rates Teachers/Researchers – 685 – 1800 Students – 450 – – Concessional rates are available only in India. To avail of concessional rates, certificate from relevant institution is essential. Remittance by money order/bank draft preferred. Please add Rs 35 to outstation cheques towards bank collection charges. Institutions – 1500 – 4150 Individuals – 1250 – 3500 (US $) Air Mail Surface Mail Institutions 1yr 2yrs 3yrs 1yr 2yrs 3yrs Sri Lanka, Pakistan and Bangladesh 80 150 200 65 120 175 Other countries 150 275 375 90 170 240 Individuals Sri Lanka, Pakistan and Bangladesh 50 90 125 30 50 75 Other countries 100 175 240 65 120 170 All remittances to: Economic and Political Weekly Hitkari House, 284 Shahid Bhagatsingh Road,
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Director : S L Shetty Economic and Political Weekly February 11, 2006 (Continued from p 450) will hopefully be implemented in future by the policy-makers. But, if neither Sen nor the expert group have the benefit of quality empirical analysis and reliable macroeconomic models, a policy of encouraging FII flows has at least the same probability of being correct as does a policy of discouraging them. With T T Ram Mohan arguing that the macroeconomic impact of volatility in stock prices, if any, is limited on many counts and that the perception that FIIs are hot money and inherently destabilising is not borne out by experience elsewhere or in India, the probability of the Lahiri committee’s prescriptions being correct increases to more than 50 per cent. Ram Mohan does not find any reason to dread FII flows. He seems to have answers to manage the uncertainties created by the participatory note (PN) component of FII inflows. Given that the Lahiri committee did not have such quality analytical inputs that Sen would have wished and given Ram Mohan’s analysis, Lahiri deserves compliments for the courage to prescribe policies associated with more than 50 per cent probability of being correct rather than a prescription for discouraging buying and selling of Indian securities by foreigners which has less than 50 per cent probability of being correct. Indian macroeconomic and monetary policy decision-making and management can no longer continue to be set under a forced framework of certainty and insulation from linkages with global environment and practices. We need to pull up our socks, apply our brains and take responsibility for our decisions in the face of increasing uncertainty and risks, irrespective of what quality of analytical inputs we are able to base our decisions on. BASUDEB SEN Here are some guidelines fortake up to six to eight months from the address, day-time phone numbers andauthors who wish to make date of acceptance to appear in the email address. submissions to the journal. EPW. Every effort will, however, be made (The email address of writers in the to ensure early publication. Papers with Special Article, Commentary and immediate relevance for policy would be Discussion sections will be published atEPW welcomes original research papers considered for early publication. Please the end of the article.) in any of the social sciences. note that this is a matter of editorial * Authors are requested to prepare their * Articles must be no more than 8,000 judgment. soft copy versions in text formats. PDF versions are not accepted by the EPW. Authors are encouraged to use UKbe processed. EPW invites short contributions to the English spellings (Writers using MS Word version, we would appreciate a copy of references, minor changes, etc, as this along with the submitted paper. this poses challenges in processing. * Graphs and charts prepared in MS Readers of EPW are encouraged to send * All submissions will be acknowledged Office (Word/Excel) or equivalent comments and suggestions (300-400 words) immediately on receipt with a reference software are preferable to material on published articles to the Letters column. number. Quoting the reference numberAll letters should have the writer’s full name in inquiries will help. prepared in jpeg or other formats. * Every effort is taken to complete early and postal address. * EPW posts all published articles on its web site and may reproduce them on CDs. processing of the papers we receive. Since we receive more than 35 articles Address for communication: EPW encourages researchers to comment every week and adequate time has to be Economic and Political Weekly, on Special Articles. Submissions should be provided for internal reading and external Hitkari House, 1,000 to 2,000 words. refereeing. It can take up to four 284 Shahid Bhagatsingh Road,
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T(Continued on p 528)
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