In a clear reflection of RBIs concerns, Governor Raghuram Rajan, talking to researchers and analysts in a conference call last week, said he would prefer real tourists but not bond tourists.
The queries were raised at the post-policy researchers and analyst conference in Mumbai a day after the monetary policy announcement last month. Rajan underscored efforts the government was making towards getting India included in global bond indices. Investors who track such indices, calibrate their exposure with how the index is constructed. So India can get a strong upside in dollar inflows when the indices expand their weightage of the economy.
But he added, there will be two hurdles. The significant rise in flow of foreign debt investment will make India more susceptible to possible reversals and also bring the economy pretty close to capital account convertibility reducing the space for RBI to act independently. We like tourists, but we like real tourists who spend money here, not so much the bond tourists, Rajan said during the conference. He accepted that index investors are more stable, but sounded cautious on opening up and said that they will have to find a way to calibrate it so that they get more stable investors.
Market experts feel that the government is moving towards opening up and that is a welcome move. As of now since there is restriction on the amount of bonds that FIIs can hold, people dont come for the long-term but with opportunistic motive. However, once it is opened and India is included in the index then long term money will come in along with short-term money and there will be more stability, said Nand Kumar Surti, MD and CEO, JP Morgan AMC. JP Morgans Government Bond Index- Emerging Markets is one of the major bond indices.
RBI Deputy Governor HR Khan accepted that in July and August this year the experience related to capital outflow was not very encouraging. We have to take a call how do we move and if we can strike a balance between their requirement of unlimited access, and some sense of opening in a calibrated manner with a bias towards long term real money investors, said Khan.
Between June and August FIIs pulled out a net $9.2 billion from Indian debt, making the rupee volatile. It breached 68 against the dollar.