Analysts say FDI reforms positive in short-run
Mumbai: Analysts have hailed the government's move to ease foreign direct investment (FDI) norms in as many as 12 sectors, saying the decision will help the rupee in the short-term and also fund the current account deficit (CAD).
"Though, I don't expect foreign capital to start flowing in immediately, the decision can help strengthen the currency in short-term due to change in sentiment. However, a favourable impact in the medium-to-long-term will depend on continuous reform measures, which in turn will alleviate some current account deficit financing issues," Devendra Kumar Pant, Chief Economist and Head - Public Finance at India Ratings, said.
However, Morgan Stanley's Chetan Ahya, in a note, said the last night's announcement is another small measure by the government to support the investment sentiment and called for more sustainable steps to stem the rupee slide and arrest the CAD, which stood at a record high of 4.8 per cent last fiscal.
Singapore-based DBS Research said the steps show that the reform machinery is back in motion again.
"These moves should provide some incentive for private sector players to seek offshore partners. However, to enable these interests to translate into material inflows, the infrastructural bottlenecks will need to be ironed out," Radhika Rao of DBS said in a note.
Pant warned against the increasing dependence of the economy on volatile portfolio and debt-related capital inflows to finance CAD.
The Indian currency has lost more than 9 per cent against the dollar since the beginning of the fiscal, thereby becoming the worst performing currency in Asia.
Pant noted that on macro-front, "a strengthening rupee will not only support the leveraged corporate sector, but also help the government adhere to its fiscal consolidation plan as the subsidy bill, especially in the oil and fertiliser sectors, is susceptible to exchange rate variation."
The government yesterday hiked FDI in a dozen sectors, including 100 per cent in telecom and higher caps in insurance and defence sectors, to boost the sagging economy.