Apr 10, 2000|
India: Geared to take on the FIIs
The recent controversy regarding the imposition of capital gains tax on foreign institutional investors (FIIs) based in Mauritius once again brought to the fore the issue of an outflow of capital from the country. This time however India seems well placed to service such an outflow of capital.
The latest available Weekly Statistical Supplement of the Reserve Bank of India puts India's total reserves at over US$ 36.5 bn. Of this, US$ 33.4 bn are foreign currency assets. On the other hand, the value of FII holdings is estimated to be in the vicinity of US$ 14 bn (just 42% of the RBI’s foreign currency assets). Therefore, if and when there were to be an outflow, the Reserve Bank of India, could absorb all the demand and as a result prevent any exchange depreciation!
Read equitymaster’s study on FII investment in India
And this is not all. With the software sector expected to rake in over US$ 6 bn on the current year alone (the size of the industry is expected to touch US$ 80 bn by 2008), the pressure on the exchange value of the Indian Rupee should be dramatically reduced. So, why the rush by the finance minister to give an assurance that cases would not be pursued against genuine FIIs?
Read equitymaster’s view on the issue of taxing FIIs based in Mauritius
Equity values. That's what the key concern seems to be. An outflow of funds, all US$ 14 bn of it (approximately 4% of the market capitalisation of the BSE) may be absorbed by the RBI but the stock markets would definitely take a beating. And this is what concerns the finance minister. After all the stocks markets are regarded as a barometer of a country's economic performance.
Increasingly people are beginning to question the government's favoured stance towards FIIs. Whether this latest happening will serve as a trigger to correct this anomaly as yet remains to be seen?
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