Read:  How can FIIs boost the Indian economy?

 

Foreign Institutional Investments (FIIs) definitely boost the Indian economy, but before we learn how FIIs can help boost the Indian economy, it is important to understand what FIIs are. Foreign Institutional Investors are essentially investors or investment companies that are not located within a country or area in which they are investing. In layman’s terms, they are outsiders in the financial markets of a particular country. FII is a common term in the financial sector in India although it is not as frequently used as FDI. 

 

In fact, many people confuse FIIs with Foreign Direct Investments (FDIs). FDIs are usually associated with the growth of exports whereas FIIs are monies which chase stocks in the market. Also, FDIs are permanent in nature whereas FIIs fly away at the slightest economic or political disturbance. 

 

 

Over the years, emerging markets, including India, have become hot investment destinations for foreign institutional investors because of their huge growth potential. The Securities and Exchange Board of India has more than 1400 foreign institutional investors registered with it and this figure is likely to increase in the next few years. Institutions involved in FIIs are mutual funds, hedge funds, pension funds, university funds, foundations, endowments, charitable societies, and insurance companies. 

 

FIIs have a huge impact on the Indian economy – a sudden influx of FII can essentially drive the stock market. In fact, a large part of the 25% (plus) rally in Sensex in 2012 can be attributed to the Rs 1.23 trillion (US$ 20 billion) of inflow from FIIs. Additionally, FIIs lower the cost of capital and provide access to cheap global credit. 

 

Recently, reports surfaced that after a reduction in the bond buying program by the US Federal Reserve, India witnessed a sharp decline in the Indian equities by over Rs 2,000 crores. In fact, after the US Federal Reserve made this announcement, foreign investors withdrew Rs 2,000 crores from Indian equities within a fortnight.

 

 

If FII inflows slow down, it will reduce the wealth generated by the stock market and we will witness the depreciation of the Indian currency. In addition, the Reserve Bank of India would have to increase interest rates to prevent huge swings in the exchange rate. As such, companies that are unable to fund their growth internally will go into losses and this will eventually hinder the growth rate of the Indian economy.

 

FII inflows have grown in importance over the last few years not only in India but other emerging markets too. On February 17, 2014, Finance Minister P Chidambaram announced a ten-point agenda to make India the third largest economy in the world by 2043, behind the US and China, and in one of the points, he stressed the importance of FIIs in the Indian economy. At present, India’s current account deficit is high and it will take a few years for this value to decrease significantly.

 

India’s current account deficit can be financed only by foreign investments, which is why the Indian government is coming up with ways to increase FIIs. The government and industry experts are confident that India will attract more FIIs in future, and this will in turn boost the economy of the country significantly.