FIIs take back record $13.7 bn from India investments during December quarter

Foreign investors- both FDI and FPI combined- took back home a record net $13.7 billion as profits from their investments in India during December 21 quarter even as fresh FDI investments were just about $ 5 billion and FPIs pulled out their investments in India, an analysis of latest balance of payments numbers indicates.

This implies foreign investors are using their India profits to shore up their global balance sheets rather than investing them on projects back home.

“This trend is serious because it indicates that reinvestment of gains has become negative. One is that investors are wanting to use profit earned to their global profit and loss account” said Madan Sabnavis chief economist, Bank of Baroda. “Second they do not see exciting time in immediate future to reinvest. I suspect this will be a global trend. More of pandemic after effect.”

It is not unusual for a country with larger foreign investments coming in to be paying more in dividend and investment income, and given there has been a spate of capital raising, some dividend related outflows, both to domestic and foreign investors is inevitable.

But repatriation of investment income has emerged as a major item of outflows not only in the current account which captures permanent flows., but also in the overall balance of payments that included capital flows which could be reversible and that is a cause of concern particularly when fresh capital inflows are slowing down and the current account deficit is rising.

During April-December, net investment income repatriation touched a record $35 billion with about 70 per cent or $24 billion being income from FDI inflows, data indicates.

Some economists see this trend as a temporary phenomenon and see some inflows in form of reinvested earnings once the global economic environment improves. The broader message is that while some income outflows are inevitable, a lot of this money does tend to come back as capital injections or retained earnings, according to Rahul Bajoria, chief India economist at Barclays Capital.

“So even if there is an outflow on the current account, some of it comes back as reinvested earnings, which too has been steadily rising over the last decade or so.”

The deficit in investment income could also reduce once income from investments of foreign exchange reserves assets improve as the global interest rates rise. “We reckon that as global interest rates rise, the more conventional source of inward investment, i.e. return on RBI’s foreign reserves will rise, which will help to mitigate these equity income outflows” Bajoria said.