Indian government’s proactive measures to improve regulations, aid infrastructure creation and keep improving the ease of doing business will continue to make India an attractive destination for foreign capital.
A key aspect in the growth of economies is the participation of Foreign Institutional Investors (FIIs), whose investments play a pivotal role in driving economic growth. The same goes for India – these international players, with their vast resources and deep expertise, have brought significant value to the Indian market. FIIs are vital in nurturing capital markets as they provide global exposure and expertise in addition to capital. Their investments enhance market efficiency, depth, liquidity, boosting confidence and attracting further investments. As of September 2022, foreign investments in India’s primary markets stood at around Rs 15,500 crores (~US$ 2 billion), a testament to their importance in the financial ecosystem. FII investments have also lowered the cost of capital, providing easy access to affordable global credit, and aiding the country’s economic growth.
The Government of India’s proactive measures to improve regulations, aid infrastructure creation and to keep improving the ease of doing business is expected to continue to make India an attractive destination for foreign capital. Recent measures like the simplification of FDI policies and the creation of a single-window clearance mechanism for foreign investors coupled with the proposed simplification of the investment regime for foreign investors have been instrumental in propelling economic growth. The government has also initiated reforms to ease the flow of foreign funds into sectors such as insurance, pension, and banking. At the same time, macro-economic upheavals such as the Ukraine-Russia war, the dislocation and realignment of global supply chains, increased inflation and slowing growth have posed challenges for business leaders at a global level. What has worked for India even in the backdrop of such uncertainty is our economy’s resilience and the increase in growth opportunities.
FII interest in Indian markets and Alternate Investment Funds
The increasing interest of development-backed institutions, sovereign investors, and philanthropic entities in Indian funds with a strong track record is indeed impressive. These discerning investors have demonstrated a penchant for key themes that align with India’s resolute commitment to the Paris Accord and the G20, such as climate action, environment, social impact, and healthcare. For instance, some of the major developmental capital providers such as USA, Japan, France, Germany, UK, and the EU – part of the G7 – have been instrumental in financing infrastructure projects, promoting clean energy initiatives, and supporting human resource development in India. With global strategic realignments, India has emerged as a preferred investment destination due to its open economy and growing commitment to ESG and net zero goals. As a result, India is attracting stable sources of foreign capital, which could fuel the country’s sustainable development goals in the long run.
Diversifying FIIs across multiple countries: The significance
From the point of view of India-focused funds, diversifying the Limited Partner (LP) cohort is advantageous for multiple reasons. Leveraging this opportunity would help mitigate risks associated with over-reliance on specific sources or geographies for capital, thereby providing a cushion against economic downturns or geopolitical disturbances. It also helps broaden the funds’ network and relationships, which can lead to the discovery of new investment opportunities and ideas. Diversification helps increase the GP’s reputation and credibility in the market, as such a portfolio signals competence in managing multiple sources of capital.
The upward move of climate-conscious investments
Climate-themed investment is another key area of interest for FIIs in India. Given the country’s noteworthy contributions towards renewable energy, the nation is now emerging as a leading player in the sustainable investment space. To promote the growth of green energy sources, there has been a substantial increase in the budgetary allocation for a number of initiatives involving alternative sources of clean energy. This increase in government expenditure towards green initiatives is unprecedented and signals a significant step up in India’s efforts towards decarbonizing its economy. This pronounced move towards climate-centric investments is also expected to increase FII interest in India in the times to come.
The India promise
The heightened levels of global inflation experienced by many economies, combined with slowing growth, have raised concerns regarding uncertain returns for investors. On the other hand, India boasts of steady, single-digit inflation rates – which along with a stable government, favorable policy/decision making and a large base of young consuming population – make it one of the most attractive investment destinations. The Indian economy has been consistently growing over the years, with a projected GDP growth rate of 7% in 2022-23.
With US inflation on the rise, the stock market is expected to take a downturn, thus leading to an upsurge in interest in Indian investments. The Indian government’s focus on ease of doing business, coupled with robust regulations, has made the nation an attractive destination for foreign investors. The latest Union Budget keeps the focus on growth, and the proposals made will work towards keeping FIIs’ interest firm in the nation. As India continues to reform its economy and improve its business environment, the inflow of foreign capital is expected to increase.
In Conclusion
The importance of foreign investment in India’s economic progress cannot be overstated. External factors such as global economic conditions and political impermanence may impact FII inflows, leading to a depreciation of the Indian rupee and slower economic growth. It is therefore upon us to foster an environment conducive to attracting foreign capital, improving regulations, and bolstering our financial markets to sustain our economic growth trajectory.
https://www.financialexpress.com/market/role-of-fiis-in-progressing-the-investment-landscape-of-india/3111193/
