Foreign Portfolios Contributed More To RBI's Dollar Reserves Than Direct Investment

The accretion of foreign exchange reserves in the Reserve Bank of India's coffers came from overseas portfolio flows into the country rather than foreign direct investment, according to the central bank's data released on Thursday.

In nominal terms, the RBI's forex reserves rose by $16.6 billion during the April-June quarter.

In the quarter ended June, the share of foreign portfolio investors adding to the reserves rose 15.7% from the deceleration of 14.6% in the period a year ago. However, foreign direct investments declined to 5.1% during the quarter, compared to 13.4% a year ago.

FDIs are considered a more stable source of funding and are more permanent in nature.

A relatively stable and better economic growth in India, compared to China and other emerging markets, has attracted FPIs towards Indian assets in recent months, according to Radhika Piplani, chief economist at DAM Capital Advisors Ltd.

Further, the country's growing dominance in the geopolitical landscape, along with strengthening trade ties, have also improved the outlook for India.

"Even if we were to argue on the reversal of portfolio flows on account of risk aversion at the time of rising oil prices and a higher-for-longer interest rate scenario globally, the reversal would only be modest," Piplani wrote in a research report.

In the June quarter, FPIs bought equities and debt worth $14.4 billion on a net basis. The RBI has mopped up dollars from the foreign currency market when the rupee had strengthened above the 82-dollar level, a currency trader with a private bank told BQ Prime on the condition of anonymity.

However, the factors attracting foreign portfolio flows have not been able to lure direct investments into India.

Piplani pointed out that despite aggressive investment pitches, foreign companies are restraining from making fresh investments due to a slowdown in developed economies, such as Europe and the U.S., and global economic uncertainty.

The FDI inflows have declined more than half to $5.1 billion in the June quarter, from $13.92 billion in the same period a year ago, according to the RBI data.

"...Nevertheless, the strength in portfolio flows is likely to offset the weakness in FDI," Piplani said.