World Economy

India to Attract More FDI

India to Attract More FDIIndia to Attract More FDI

The strong economic growth outlook of India built on efficient fiscal and monetary management and a progressive reform agenda is expected to attract both foreign direct investment and foreign portfolio investments starting this year, Vikas Gautam, CEO, Aditya Birla Sun Life Asset Management Company Pte. Ltd told Gulf News in a recent interview.

“The government has been able to build a strong foundation for change which is quiet visible. Though a lot of reforms the government had envisaged have not gone through till now, but at the same time the foundation has been laid, and the result of that foundation will be visible in the next 12 to 18 months,” said Gautam.

In its latest report, ‘Global Economic Prospects’, the World Bank has projected that India would remain comfortably the fastest growing large economy in 2016, at a rate more than a percentage point higher than China. The World Bank has projected the Indian economy to grow at 7.8% in 2016 and China’s to grow at a more modest 6.7% while the world economy as a whole would grow at 2.9%.

Though the rupee depreciated last year compared to 2014, it largely managed to hold its ground compared to most other emerging market currencies. It is unlikely the rupee will face a massive depreciation as happened in 2013 when it slipped in excess of 20%. Over the last two years, the RBI has been successful in curbing extreme speculative volatility of the market.

“FDI and foreign portfolio allocations are expected to increase this year. There has been a lot of positive impact following the improved ratings as well as a number of countries from around the world are signing bilateral agreements with India to support infrastructure developments. Once infrastructure developments start, the ripple effects of that will get reflected on the capital markets for the simple reason the execution of infrastructure projects is going to be done by local companies,” said Gautam.

Unlike other emerging markets, the impact of future US interest rate hikes on capital flows out of India will be muted. The US is hiking rates because the economy is recovering. Historical data for the two decades show good growth in the US has meant strong growth prospects for India.

While future rate hikes are expected to have some immediate ripple effects, it is not likely to result in capital flight from India. On the contrary strong macroeconomic fundamentals are likely to attract more investors to India.

India is one of the few emerging markets where some of the largest pension funds either have allocated in the range of $5 billion to $10 billion over the past 12 months.

In the past, India was part of tactical allocations for most institutional investors, but now it is increasingly becoming part of their core allocation strategies.