The sharp FDI surge of last three years may slowdown: HSBC

MUMBAI: Incremental foreign direct investment ( FDI) may slowdown and may not keep pace of the last three years, a report by HSBC said.

An analysis of leading indicator for FDI inflows – investment intentions announced by foreigners, available with the CMIE . “For 2017, our leading indicator suggests that FDI inflows are likely to remain elevated at last year’s levels, again comfortably financing the CAD. However, incremental inflows may not be as large as in 2016” said Pranjul Bhandari, chief India economist at HSBC.

Foreign direct investment (FDI) inflows into India have doubled over the last three years, more than fully financing the current account deficit (CAD). Breaking down incremental FDI into digital, physical and others indicates that the initial spurt was led by digital alone, though the enthusiasm has waned in 2016 partly on the back of consolidation in some of the sectors. However, alongside, physical economy-linked FDI has risen sharply, more than offsetting the waning digital appetite.

Not only have FDI inflows doubled (from $22bn in 2013 to $46bn in 2016), FDI outflowshave also been falling, resulting in a rapid rise in net FDI gains for the economy. So much so, net FDI alone has completely funded India’s current account deficit over the last three years.

Stronger exports and higher FDI inflows have likely contributed to the strong performance of the Indian rupee vis-a-vis the US dollar in recent times. While both are likely to remain buoyant, it is important to note that incremental gains over the short term may not be limitless.

The HSBC study however concludes that over the longer term, FDI inflows are likely to rise, given India’s reform momentum, bright growth prospects, enhanced macro stability, sustained increase in FDI limits, and easier regulations.