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Investments in India: FIIs withdraw a record US$13.7 billion from investments in India in the December quarter

Bombay: Strong foreign investments Inflows during the pandemic are slowly starting to bite the current account deficit as investors permanently take home gains made in India.

Foreign investors – both ADI and FPI combined — took home a record net $13.7 billion as gains from their investments in India during the December 21st quarter, even though new FDI investment was only about $5 billion FPIs withdrew its investments in India, a recent analysis balance of payments numbers shows.

This means foreign investors are using their Indian profits to prop up their global balance sheets rather than investing in domestic projects.

“This trend is serious because it indicates that profit reinvestment has become negative. One is that investors want to use the profit made for their global profit and loss account,” said Madan Sabnavi’s chief economist at the Bank of Baroda. “Second, they don’t see an exciting time for reinvestment in the immediate future. I suspect this will be a global trend. More of a post-effect pandemic.”

It is not uncommon for a country with larger foreign investments to pay more in dividends and capital gains, and since there has been a spate of capital raisings, some dividend-related outflows to both domestic and foreign investors are inevitable.

But the repatriation of investment income has become a major outflow item, not only in the current account, which records permanent flows, but also in the overall balance of payments, which included capital flows that could be reversible, and this is a particular concern when there are fresh capital inflows slow and the current account deficit widens.

From April to December, net investment income repatriation hit a record $35 billion, with about 70 percent, or $24 billion, of income from FDI inflows, the data shows.

Some economists regard this trend as a temporary phenomenon and see some inflows in the form of reinvested earnings once the global economic environment improves. The broader message is that while some income outflows are inevitable, much of that money tends to flow back as capital injections or retained earnings, according to Rahul Bajoria, chief economist for India at Barclays Capital.

“So even if there’s an outflow on the checking account, some of that comes back as reinvested income, which has also been steadily increasing over the past decade.”

The investment income deficit could also narrow once foreign exchange reserve investment income improves as global interest rates rise. “We expect that as global interest rates rise, the more conventional source of foreign investment, ie the yield on RBI’s foreign exchange reserves, will increase, which will help mitigate these capital gains outflows,” Bajoria said.

https://economictimes.indiatimes.com/markets/stocks/news/fiis-take-back-record-13-7-bn-from-india-investments-during-december-quarter/articleshow/90646275.cms Investments in India: FIIs withdraw a record US$13.7 billion from investments in India in the December quarter

Adam Bradshaw

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