It is amazing how quickly the India forever bull story has got punctured. Of course, all this is happening on the back of an unprecedented downturn in the international economy and capital markets. Nevertheless, it is a jarring coming down to earth of all those who subscribed to the sustainability of the India growth story, this author included.

It is actually quite incredible how we as a country can allow ourselves to be so thoroughly misled by a few billion dollars of foreign capital. We were unable to distinguish between capital that matters to us and capital that is merely here to make a quick buck. All the FII money that flowed into the country in the last two to three years, and particularly in the last year, caused the stock market to go up to unsustainable levels, and the rupee to appreciate very uncomfortably. The same money is now flowing out because this money had loyalty only to high returns as quickly as possible. The stock market has collapsed and so has the rupee. These wild gyrations are making it impossible for corporates and Indian banks to manage their FX exposure sensibly. FX hedges taken when the rupee was at 40 to a dollar, are deep underwater now that the rupee is at 50 to a dollar. Funding plans (everybody benefited from the easy liquidity) have had to be scrapped.

We need to develop deeper domestic institutional funds and ensure that Indian investors have a bigger say in our markets. This is not to say that we do not need foreign funds. Of course we do, but we need the money to be invested in productive enterprise. We need FDI that creates jobs and manufacturing in India and the fact that FDI has gone up during this period has to be a heartening feature. We need private equity where money comes with some strategic input. We do need FII money also, but we need to have some mechanisms that make these funds stickier—of course, then some of the funds may never come in and the advocates of this money will argue fiercely to protect their ability to trade in and out at their discretion. The Indian market is perhaps one of the more volatile stock markets in the world, and therefore one of the riskiest.

Source: The Financial Express