fdi and fii – the case of money

8/7/2019 FDI and FII The case of money

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Abhishek Shukla

MBA (IT)

IIIT Allahabad

FDI & FII The case of money supplyin Indian economy


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y Foreign direct investment (FDI) refers to long termparticipation by country A into country B. It usuallyinvolves participation in management, joint-venture,

transfer of technology and expertise.


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y are three types of FDI: inward foreign directinvestment and outward foreign direct investment,resulting in a net FDI inflow (positive or negative) and

"stock of foreign direct investment", which is thecumulative number for a given period. Directinvestment excludes investment through purchase ofshares.


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y an individual;

y a group of related individuals;

y an incorporated or unincorporated entity;y a public company or private company;

y a group of related enterprises;

y

a government body;y an estate (law), trust or other societal organization; or

y any combination of the above.


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y by incorporating a wholly owned subsidiary or

companyy by acquiring shares in an associated enterprise

y through a merger or an acquisition of an unrelatedenterprise

y participating in an equity joint venture with anotherinvestor or enterprise


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y low corporate tax and income tax rates

y

tax holidaysy other types of tax concessions

y preferential tariffs

y special economic zones

y EPZ - Export Processing Zones

y Bonded Warehouses

y Maquiladoras

y

investment financial subsidies


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y soft loan or loan guarantees

y free land or land subsidies

y relocation & expatriation subsidies

y job training & employment subsidiesy infrastructure subsidies

y R&D support

y

derogation from regulations (usually for very largeprojects)


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y Institutional investors are organizations which poollarge sums of money and invest those sums insecurities, real property and other investment assets.

They can also include operating companies whichdecide to invest its profits to some degree in thesetypes of assets.


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y Pension Fund

y Mutual Funds

y Investment Trusty Insurance or reinsurance companies

y Investment Trusts

y Banks

y Endowmentsy University Funds

y Foundations

y Charitable Trusts or Charitable Societies


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As the FII investment has been on

a northward drive for the past few

months owning to strong

fundamental of the Indianeconomy and the rising stock

market, the market watchers are of

a view that it will not overheat the

Indian economy.

H

igh FII investment good for Indian economy


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y meaning :

FDI : : if any foreign entity or investor obtain or acquire thecontrolling interestFII :If any foreign investor want make capital gain and that is for

short durationsource :FDI : FDI come from MNCs and corporate so as to derive benefitof new market , cheaper resource , efficiency and skill

FII: FII come from investor, mutual fund company, portfoliomanagement and corporate with pure motive of investmentgains


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form :FDI : FDI generally comes as subsidiary company or joint

ventureFII: It comes through stock market

Regulator body :FDI : RBI , ministry of finance and FIPB( foreign investmentpromotion board )

FII: SEBI ( security exchange board of India )

Purpose:FDI : : diversification and expand at global coverageFII: FII sole criteria and motive is gains on investment

duration :FDI : long periodFII short period.


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y 1.Creates employment opportunity for domestic country.2.Good relation between two countries.3.Modern technology.4.Inflow of foreign funds in Indian economy.5.To provides the goods and services at best suitable price.6.It creates the competition among the domestic company andMNC in this way domestic co can increase their efficiency.7.Indian company get chance to work professional body.8.Indian company get chance to work with world market LeaderCompany.

9.Backward area can be developed.10.Creating good capital market in India.11.Government earns in the form of licenses fees, registrationfees, taxes which is spend for public expenditure.


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y 1. FII leads to appreciation of the currency: FII need tomaintain an account with RBI fro all transaction. tounderstand the implication of FII on the exchange rate wehave to understand how the value of one currency

appreciate or depreciate against the other currencye.g. ifIndian customer want buy one quantity of ice cream fromUSA market ( suppose price of1 ice cream is 1 USD ) he willhave to pay 50 INR which is equal to 1 USD. But whenexchange rate changes he will have to pay 40 INR instead of

INR which is equal to1

USD.In short purchasing power of Indian customer have risenow they will have to pay less amount to buy ice cream orthey can buy more quantity of ice cream at same price .


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y Depreciation: suppose forex rate is USD = 40 INR, after some time Its 1USD = 50 INR that means INR have depreciate over the USD.Reason is same.We take one example.Suppose India import ice cream from USA. First quote is 1 USD = 40INR. And price of one quantity of ice cream is 1 USD.

This means Indian customer will have to pay equivalent to 1 USD that is40 INR> but if forex rate is 1 USD = 50 INR. In this way Indiancustomer will have to pay 50 INR which is equal o 1 USD.Now I come to point how domestic current appreciate or depreciate ifthere if FII inf low or FII outflow.When FII come in India they creates rupees demand and by demandand supply rule the price of INR appreciates.

Similarly if FII withdraw the capital from the domestic market or wecan say when they sell their share it creates the demand for US dollarand that time demand for dollar will be more and resulted INR willdepreciate


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y 2.FII and exports: if our Indian currency appreciates just because of FII(net inflow in India) there is adverse effect on our export. Our exportindustry will become uncompetitive due to appreciation of rupees.

E.g. if USD = INR 40 and a soap costs 1 USD. Now when the rupeesappreciated 1 USD = 20 inr , I will have to sell the same soap to the US

for 2 USD in order to sustain the same income that I have been makingi.e. 40 INR.

Logic is very simple. First I sold my soap at INR which was equal to oneUSD. But after appreciation I would like to sell 2 USD to get my sameincome that means I will charge more US dollar from USA customer. Soif we charge high price of course customer will be less.

The excess FII fund inflow in the country can also make a negativeimpact on the economy of the country.


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y 3.FII and stock market: when cap on FII is high then theycan bring in lot of funds in country stock market and thushave great influence on the way the stock market behaves,going up or down. The FII buying pushes the stock up and

heir selling shows the stock market down.4.FII and inf lation: the huge amount of FII fund flowcreates the huge demand for Indian rupees. In thatsituation RBI print more money in the market. thissituation could lead to excess liquidity therby leading to

inflation , where too much money chase too few goods andservice ( perfect example of demand pull inf lation)Thus there should be a limit to the FII inflow in thecountry.


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y 5.FII and local companies: when huge FII comes in anycountry there is much availability of fund for localcompany in this time local co. Can expand their coverage. `

6.Capital formation in domestic market: if there is muchFII inflow in the country will not borrow from othercountry or from international bank. If home countryssaving rate are not sufficient to meet its investment

programmed but if FII inflow is well there is no problem.India is developing country and its domestic saving is lowcompared to developed countries. So here is need for FIIinflow.


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y FII is vey dangers in case of HOT MONEY concept:We take one example. If RBI gives the interest rate 9%on foreign investor deposit which is high in Asia ten ofcourse foreign investor will attract in Indian market to

make capital gain. But if in this case bank of chinaraised their interest rate up to 10 % which will behigher in Asia of course all FII will be shift from Indianmarket to Chinese market an d this will be happen ifany nation again increase the interest rate. These FIIinflows are very volatile. Its disturb the economy at thetime of coming and going. And Hench this conceptcalled hot money concept.


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fdi and fii – the case of money

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