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Friday, November 4, 2011

The Investment Environment Appears to Be Down Beaten in India

The investment environment system appears to be downbeat during the first six months of this year relative to last year with a total of 4.22 lakh crore from all sources compared to 4.61 lakh crore last year according to a survey conducted by the care ratings. Overall flow of funds for production and investment purposes appears to have slowed down during the first half of the year. The Investment environment can be captured on the financial side by looking at the various sources of funding such as bank credit and capital markets on the domestic front and ECBs and FDI with respect to external capital.

Bank credit has grown at a much slower rate this year in terms of both conventional credit as well as credit-like instruments. This may be attributed to lower demand for credit due to lower growth in industry as well as higher cost of credit which was a restraint.

A study carried out by CARE Ratings on the capital market funds of Debt and Equity issuances have moderated during the month of April-September 2011 by 27.09 percent and 67.06 percent as compared with the same period last year. However once again the share of financial services companies was highest in this market and accounted for 71.6 percent of the total fresh issuances during the month of April-September 2011 followed by Services sector with 11.7 percent. Manufacturing sector raised 9.5 percent in April-September 2011 compared with 19.0 percent raised in the same period last fiscal. This could be attributed to the hike interest rate stance taken by the RBI as well as depressed secondary market conditions which discouraged IPOs. Also the weak global economic conditions had an impact on the state of the secondary markets. FII inflows in particular were lower at $ 2.1 billion as against $ 20 billion in the first half of FY11.

While the high flow of FDI so far this year has been encouraging, it needs to be monitored carefully as the global environment too has been subject to shocks emanating in the Euro zone in particular. Foreign sources of finances have been healthy in this scenario as there are advantages to be had from differing interest rate regimes across the global markets. However, the exchange rate volatility will narrow these differences. The RBI's future stance of monetary policy should take into account the overall availability of liquidity in the system as the central bank actually controls one significant part of the options open for the borrowers.