The Importance of Foreign Inflows - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 11 August 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Foreign inflows are an important part of our economy. Given that we have a current account deficit (our imports exceed our exports), we need foreign inflows and investment to make up the difference. The foreign inflows provide us with the foreign currency reserves we need to pay for our essential imports like crude oil.

Foreign inflows can be divided into two categories. They are FDI (Foreign Direct Investment) and portfolio inflows. FDI represents physical investment, e.g. foreign companies setting up in India, or creating joint partnerships with Indian companies and setting up a business. Portfolio inflows represent foreign investment into the stock markets.

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Recent economic data on foreign inflows present two contrasting figures. Foreign portfolio inflows are doing very well - investment by foreign Institutional Investors (FIIs) is close to record high levels. On the other hand, FDI is struggling. FDI is fallen to around half its levels from a year ago.

Both FDI and portfolio inflows are important, as both provide us with foreign currency reserves. However, FDI is much better than portfolio inflows from a longer-term perspective. FDI represents long-term physical investment into the country that is difficult to remove if conditions are bad. When businesses are set up in the country, it creates employment and wealth, which is obviously a good thing.

On the other hand, foreign portfolio inflows are much more unstable. They represent investment into the stock market that can easily be taken out when market conditions are bad. They can be either short term or long term, and are much more volatile than FDI. Foreign portfolio inflows are certainly good for the country, but not as good as FDI.

The latest statistics do paint a worrying picture. Although foreign portfolio inflows are high, FDI is falling fast. The slow pace of economic reforms and political gridlock has delayed many companies setting up shop in India (e.g. Swedish furniture retailer IKEA), and this has impacted FDI.

The fact that foreign portfolio inflows are high implies that there is plenty of foreign money that wants to invest in India. Because the stock market is easy to invest into and out of, foreign money is flowing into portfolio investment instead of flowing into FDI. It is important that the government speed up the pace of reform, so that we can get those FDI numbers back up again.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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3 Responses to "The Importance of Foreign Inflows"

Kuldeep Nayar

Aug 12, 2012

You are right Mr. Dossani. Lack of FDI signals a lack of faith in the India story. Politicians, are you listening? Economists, are you listening? FII's are better known as Fickle International Investors who will withdraw their funds at a drop of a hat. If you were a bank what would you prefer; a large portfolio of current accounts, or that of fixed term deposits. Therein lies the difference between FII & FDI.

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Sthithapragnja

Aug 12, 2012

Asad Dossani Ji,
With all humility foitfied with ignorance in abundance(of the Economics/economy and the Stock Markets)I am prompted o observe s under:

The Inflows of both Foreign Direct Investment(FDIs) and the PORTFOLIO INVESTMNTS (PIs) according to my simple mind are like the EARTH and the Ocean in one specific aspect: The Earth(more akin to the PIs)gets heated up fast during daytime and cools also fast during night-time) where as the Ocean gets heated up slowly and retains the heat(keeps warm for longer-time) but cools down slowly during the night and as such is more akin to the FDIs ??
One more similie crops up in my simple mind:
The ALLOPATHIC System (medicines) and AURVEDIC system of treatment are also similar to the Earth and the Ocean insofar as the speed with which they take effect??
Allopathic system may be more quick to take effect(perhaps leaving some possible severe side-effects) but the Ayurvedic system administers /treats the disease(the underlying causes) but is slow to take effect but leaves no side-effects therefrom !!
I haaten to conclude !
(I am not a medical expert but an ignoramus to the core!)

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Dalip Singh

Aug 12, 2012

You don't need a rocket science to understand why so is the case in point.The Congress party from its given nature of Vote Bank Politics from the start is responsible for all the ills today affecting the economy and overall situation in the country going worse by the day.Assam situation today is a living example of their wrong policies to appease the minorities to garner votes.The same goes with FDI.No party worth its salt talks about controlling the burgeoning population bomb that the country is sitting on.When crores are paid to get tickets as bribes to fight election,they are not for nothing.And in return what does a tax payer get a corrupt minister led by team of equally corrupt Babu in tow to loot the wealth of the nation.I have no expectations today left from any known political party in this country.No reforms nothing is going to come.We are sitting on the verge of a civil war if things carry on the way they are and this country will break in thousand pieces.Thanks to our Netas.By the way the degree required to come to the parliament and in power is the foremost after small time muggers to full time graduate and post graduate in criminal activities.

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