Foreign fund flows: Need calibrated system in place, says G Mahalingam

Since the beginning of this calendar year, foreign investors have bought a net of $19.95 billion in Indian debt and $6.9 billion in equities. As a result of strong inflows the rupee has appreciated 5.9 per cent against the dollar this year.

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Indian regulators should think of ways of allowing foreign investments under “a calibrated system”, whole time member of the Securities and Exchange Board of India, G Mahalingam said on Wednesday. He also warned about the impact of strong foreign inflows on the currency. “A huge amount of foreign inflows into the country at a time when the currency in the country has been showing a substantial amount of appreciation is something which the regulator is going to be concerned about,” said Mahalingam at the capital markets summit.

“We need to be very careful as far as allowing the foreign flows into the country are concerned. We can think of maybe different ways of allowing these flows in under a calibrated system,” he added.

According to Bloomberg data, since the beginning of this calendar year, foreign investors have bought a net of $19.95 billion in Indian debt and $6.9 billion in equities. As a result of strong inflows the rupee has appreciated 5.9 per cent against the dollar this year. This has raised concerns about the impact on export competitiveness. Mahalingam also said the rupee-denominated bonds, popularly known as masala bonds, are likely to add to the nation’s external liabilities.

“Masala bonds don’t hold any currency risks but at the same time, the external liability of the country goes up. This needs to be kept in mind,” said Mahalingam. These bonds are debt instruments through which designated domestic entities can raise funds by accessing overseas capital markets, while the bond investors hold the currency risk. In fact, the World Bank arm IFC thus far has raised the largest amount through this instrument.