Rupee might come under pressure as foreign investors send back dividends

MUMBAI: Popular belief that overseas fund flows are good in boosting economic growth as they fund imports without the currency losing value is beginning to shake, with payouts from such funds denting the current account deficit more than ever.


The rupee could come under pressure as foreign investors begin to repatriate dividends and Indians who borrowed overseas pay interest which is outweighing the advantages of borrowing in foreign currency. Investment income outflows, essentially dividend income and interest paid, touched $23 billion in the nine months of FY13, up from $18 billion a year earlier.

It was $16 billion in fiscal 2007, data from Reserve Bank of India shows. “The CAD is increasingly financed by fresh capital flows, particularly debt which, in turn, adds to the interest burden, setting off a feedback cycle,’’ said Saugata Bhattacharya, chief economist Axis Bank.

“Remittances have remained more or less flat, while interest and royalty payments have gone up sharply. Rising external debt might be perceived as increasing country risk, which might weaken the rupee over time.”

Outflows under ‘investment income’ include dividend repatriation by foreign investors, including MNCs and portfolio investors, of their profits from investments in Indian companies, interest paid on external commercial borrowings and subscription to Indian debt. Inflows, on the other hand, also include income earned on deploying foreign exchange reserves.

The Current account deficit rose to a record 6.7% of the GDP in the December quarter setting off alarm bells. But policy makers have argued that strong overseas flows have helped fund the disproportionately high imports, mainly gold and crude, and that more such flows could fund consumption. But such flows may not be just one way as the funds invested in India earn returns and that gets remitted abroad.

That gets magnified when remittances from the Indian Diaspora are weak. Indeed, the past flows are becoming a drag on the current account deficit as these may rise. “We expect these outflows to continue to rise as low global interest rates keep receipts low, while the recent trend of rising debt inflows should keep payments high,” says Sonal Varma of Nomura Securities.

“We see this as a structural drag on invisibles and thus one of the reasons behind the growing current account deficit.”