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Why FDI measures are unlikely to help the rupee

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The government on Tuesday relaxed foreign direct investment (FDI) rules in a bid to attract foreign investment in the country and ease the pressure on the currency. However, the Indian rupee slipped against the U.S. dollar after a modest start. Market analysts said the steps are positive, but will not have an immediate positive impact on the stock markets or the rupee. "We doubt there will be any significant impact on flows this year," Sonal Varma of Nomura said.
Here's why these steps have failed to excite markets
  1. The government raised the foreign direct investment (FDI) cap in four sectors and changed the FDI route to automatic (compared with the earlier route of requiring approval from the Foreign Investment Promotion Board) for eight sectors on Tuesday.
  2. The steps are aimed to ease the pressure on the rupee, which hit a record low of 61.21 last week, and kick-start the economy, which grew at the slowest pace in a decade in the last fiscal.
  3. The rupee is under pressure because of high current account deficit (the difference between exports and imports) and high inflation (and as a result low real interest rates). The government hopes that easing FDI rules will help attract dollars (which will support rupee) and drive the economy (more investments).
  4. Why these steps failed to boost sentiments: These measures are medium-term positives (not short term) as they will help attract stable long-term capital inflows.
  5. Some announcements are mere reiterations: The hike in FDI cap in the insurance sector has been increased from 26 per cent to 49 per cent, but this can come into effect only when Parliament clears the Insurance Bill. "The biggest thing, which has been hanging as far as the insurance industry is concerned, is the Insurance Act itself. Without that Bill being passed, this step is of little value," Amitabh Chaudhary, MD and CEO of HDFC Life told NDTV.
  6.  For the telecom sector, the government has okayed complete ownership (100 per cent FDI) by foreign firms, but considering the competitive environment and regulatory overhang, it's unlikely that this step will excite global companies, some of which are already present in the country. Gaurang Shah of Geojit BNP Paribas told NDTV that no foreign investor will be in a hurry to come in and start putting in dollars in the telecom sector at a time when domestic telecom players are finding it hard to survive.
  7. The government did not hike FDI cap in politically contentious multi-brand retail to 74 per cent (as recommended by the Arvind Mayaram Committee).
  8. The government opened up the aviation sector in October last year, but the only proposal so far (Etihad's proposed investment into Jet) has hit an air pocket raising concerns around the execution of Tuesday's announcements."There's still a lot of clarity required on guidelines in the retail and aviation sectors opened earlier," Mr Shah added.
  9. For the defence sector, any FDI above 26 per cent will require approval of Cabinet Committee on Security (government discretion). Further, such proposals should involve state-of-the-art technology proposals.
  10. Global investment bank Morgan Stanley said these measures will reduce some pressures, but the direction will still be driven by the trend in the US dollar and real rates until India's current account continues to stay higher than 2.5 per cent of GDP and its CPI inflation remains above 7 per cent. Currently, the underlying current account deficit is around 4.5 per cent of GDP, and CPI inflation is 9.9 per cent.




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