PremiumFrom an annual average of $60 bn in the three years before the pandemic (FY17-19), aggregate FDI flows have increased to more than $80 bn in the last two fiscal years.
MUMBAI : Foreign direct investment (FDI) into India has grown significantly through the pandemic years and cushioned the fall in the rupee as it bolstered the Reserve Bank of India’s firepower despite a widening current account deficit (CAD).
From an annual average of $60 billion in the three years before the pandemic (FY17-19), aggregate FDI flows have increased to more than $80 billion in the last two fiscal years. In the first half of this fiscal year, FDI stood at $39.1 billion and experts believe it could touch $80 billion by March-end (see table).
“The full year run rate in FY23, based on H1FDI flows is also approximately $80 billion, despite the challenging global funding environment, especially the PE/VC activity for start-ups," said Ashutosh Datar, co-founder of data and analytics firm IndiaDataHub, citing the data.
Higher FDI flows, coupled with a sharp reduction in the current account deficit during the two pandemic years, swelled India’s reserves. The reserves climbed from $413 billion as of FY19 to $478 billion as of FY20 end and further to $607 billion as of FY22.
“The increased firepower with the RBI (higher forex reserves) allowed it to curb the volatility in the rupee in the current year despite the sharp widening of India’s current account deficit," said Datar.
The rupee has weakened by almost 10% in 2022 so far to 81.73 a dollar, compared to the Indonesian Rupiah (minus 8.11% )and the South Korean Won (minus 8.5%).
Between January and September this year, the RBI sold around $55 billion from its reserves to support the rupee. Despite this, the forex reserves as of September at $533 billion are higher than at what they were at the start of the pandemic.
The FDI momentum has remained resilient this year despite the challenging global funding environment and high CAD. CAD is the difference in the value of exports and value of imports.
“The FDI inflows have helped to strengthen India’s fundamentals by countering pressure from the current account side," said Madan Sabnavis, chief economist, Bank of Baroda, who expects inflows to continue “apace."
India being a developing country with reliance on imported energy normally runs a CAD. It was 1.2% of GDP in FY22, down from a rare surplus of 0.9% during the pandemic year of FY21. It is expected to widen to 3-3.2% of GDP this fiscal with the trade deficit in H1FY23 at $149.47 billion as against $189.5 billion for FY22.
Higher FDI flows have come as an offsetting factor in this environment.
“The rupee has been supported by rising FDI, growth and relatively moderate inflation," said Nilesh Shah, MD, Kotak Mahindra AMC.
“The only chink in India’s armour is a rising trade deficit….we will continue to attract FDI if we follow the Sanand model of ease of doing business," Shah added, referring to the record 18 months in which Tata Motors was able to roll out the Nano with all approvals in place.FDI tends to be more sticky than FII which is relatively short term in nature and dependent on the vagaries of market sentiment. In contrast to rising FDI, FIIs net sold $18.46 billion in FY22 and another $2.7 billion so far this fiscal.