There has been a hue and cry over foreign portfolio investors (FPI) pulling money out of the equity market in July and August. While these flows do have a short-term impact on stock prices, there isn’t too much to worry as far as the economy is concerned. Foreign direct investments (FDI) have been robust this year and will more than make up for the short-fall in the portfolio flows.

FPIs pulled out around $4 billion in August and September, causing a nervous flutter among the investor fraternity. These outflows were mainly due to the redemption pressure faced by global emerging market funds. But the staid and stolid FDI flows have continued to pour in to the country, notwithstanding the global turbulence.

While FPIs have invested around $10 billion in Indian equity and debt between January and October this year, direct investors have invested more than twice that amount — $24 billion — between January and August. Inflows from FPIs account for less than a quarter of the total foreign inflows (including FPI, FDI and NRI flows) in many years.

The good news is that there is no let-up in the momentum generated in foreign direct investments this year. While the country received record $23.3 billion of direct investment between January and August 2014, the flows this year have been slightly higher at $24.5 billion. Instead of worrying over FPIs, it would be better to focus on these direct investments that are more long-term in nature. Relaxing some sector caps for FDI is a good first move.

But it needs to be followed up with periodic evaluation of sectors where FDI can be allowed without creating serious imbalances in the domestic industry. Improving the infrastructure to enable foreign companies to set up plants, a serious re-think on our labour laws, a stable tax and regulatory regime and simplification of the paper-work are other aspects that can help.

Senior Deputy Editor & Head of Research

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