In a recent trend, foreign portfolio investors are investing in the emerging economies rather than the developed economies and pumped in Rs 62,951 crores in November in the Indian market, the highest monthly FII inflow in 2020. National Securities Depository Limited (NSDL) published a report that marked foreign portfolio investors as the principal investor category in both equities and debt segments.
Foreign Portfolio Investment a critical measure of economic growth
The volume of FPI is a critical measure of a country’s financial health. It suggests faith of foreign investors on the growth and stability of an economy.
FPI refers to financial assets and securities held by investors of foreign origin. It is different from foreign direct investment (FDI), which includes direct ownership of foreign investors in domestic companies. Instead, FPI investors are passive investors. Unlike FDI, FPI investment provides high liquidity in a volatile market.
FPI is shown in the capital account of the country and mentioned in the balance of payment. Foreign portfolio investors invest in a wide range of investment tools, including stocks, bonds, ETFs, mutual funds, and more.
FPI is an essential contributor to the financial growth of an economy. Like any other country, the Indian economy also depends on foreign investors, especially when there is a shortage of domestically available funds.
Currently, the Indian economy is struggling with a shrinking GDP that was affected by the outbreak of the COVID-19 pandemic. When the recession hits an economy, and company profit goes down, it affects production and jobs in different sectors. One way to battle the adverse outcomes of recession is by infusing more funds from outside. Foreign portfolio investment plays a critical role in reviving an economy when it is struggling.
Advantages of FPI
FPI offers a couple of advantages to the investors like the followings.
- The investors earn returns from their investments
- Investors can also take advantage of the exchange rate differences to increase their return
- However, FPI gives investors liquidity on their investment
A glut of liquidity is a reason behind increased FPI in India
FPI inflows in November has broken all the records of the past months. Till date, it is the highest monthly FII inflow in the history of FPI investment in India. Foreign investors have pumped in Rs 60,358 crore in equities and Rs 2,593 crore in the debt segment. Experts have pinned the growth in FPI to a change in investor philosophy. Most of the large FPIs are now looking at investing in the emerging markets where their investment can earn a higher return on their investment. One can follow the same trend in other developing countries like South Korea and Taiwan, which also has seen steady growth in FPI. Investors are further urged by attractive valuation in the emerging market and tepid performance of dollar in the global arena.
November has received the highest monthly FII inflow, against Rs 22,033 crores in October 2020. Meanwhile, in 2020 a total of 1.06 lakh crores is received in FPI, which is Rs 5,460 crore more than last year’s investment. Returning foreign investors is a good sign for the economy and indicative of their faith in the country’s quick economic recovery. All India should do now is take control of its COVID-19 situation to move ahead with the lifeline offered by FII.