The government of India has allowed FIIs to invest in the Indian capital markets, and with their financial power, they invest in the markets, hike the prices and go away with profits. This gets repeated almost every year. What is the wisdom in allowing this? How are the Indian markets, government and investors benefited by FIIs?
-RS Dhaiya
The argument that FIIs come to the Indian markets at their own will and exit after making profits is a cost that we have to pay, primarily because we get capital into our markets. When FIIs buy stocks, they are entitled to the gains that they can make. FIIs first made entry into India 15 years back, in terms of portfolio investment, which has brought up significant change. FIIs are of various kinds. There are FIIs who think short-term, but there are also pension funds and mutual funds that invest for the long run. While the short-term FIIs like hedge funds can cause volatility, there are other variables as well that play a role, like the fundamentals of the economy, fundamentals of the underlying companies, as well as the fundamentals of the currency that has a strong bearing on the way the investment will perform. We believe that instead of being apprehensive about FIIs, we should more than welcome them because they not only provide capital, they have driven a change in corporate governance that we see today. And the fact is that even the Indian equity investors are as cyclical as FIIs, we don’t have a domestic mechanism where long-term money gets invested into our equity markets.
This article was originally published on July 24, 2012.
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