The buoyant foreign capital flows in debt instruments since the beginning of 2010 could weigh on the Reserve Bank of India's decision on whether to raise policy rates. According to data available, foreign institutional investors had pumped in US$ 1.72 billion (Rs 7,900 crore) into debt instruments. In fact, these have overtaken equity flows, which stood at US$ 1.38 billion (over Rs 6,300 crore).
So far in 2010, the cumulative inflows -- equity and debt -- have been US$ 3.1 billion. As a result, the rupee has already appreciated around 1.28 per cent against the US dollar during the first three weeks of the year. The sharpest increase has been seen against the Euro.
FII investment in debt instruments has gone up, as they are trying to take advantage of the higher interest rate regime in the Indian market compared with those prevailing in the developed countries facing severe economic slowdown.
While Indian government bond yields have moved up from 6.05 per cent in April 2009 to 7.70 per cent now, the interest rates in developed economies are quite low -- in some cases, close to zero. Any increase in the rates could trigger a further inflow of foreign funds into the debt market.
The RBI's third-quarter review of monetary policy is due to be announced in this month end. So RBI has a work to do...
(Image source: Mutiny.in)
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