Selling in emerging markets of FPI will have an effect on the stock market boom ...

The US Federal Reserve is set to cut its monthly bond-buying program this year, according to its chairman Jerome Powell. Inflation in the US is moving towards the federal target. The economy is making significant progress. This progress is a prerequisite for withdrawing stimuli. The labor market in the U.S. also appears to be improving, Powell said in an annual seminar. Taking Powell's statement positively, there has also been a significant surge in Indian markets.

At a meeting of the Federal Open Market Committee held in late July, a majority of committee members also voted to cut the asset purchase program later this year. July has seen strong growth in employment. The US Federal Reserve buys bonds and pours 150 billion a month into the financial system to alleviate the impact of the corona on the economy. The next meeting of the Open Market Committee is scheduled for the end of September. Powell, however, did not specify when and at what pace the Federal Reserve would cut its bond-buying program. Signs of a retreat in the bond-buying program are indicating that the financial situation is returning to normal after Koro.

Earlier, the withdrawal of relief programs in the US in 2014 created huge volatility in the capital markets of emerging countries, including India, which should not be forgotten by Indian capital market managers and regulators. In 2013, the rupee weakened against the dollar as a result of large outflows of funds by foreign institutional investors. Although the situation is different this time around and the US Federal Reserve is seeking a phased withdrawal from the relief program, the pace of shock to India's capital markets is expected to be limited. But looking at the history of the country's capital markets so far, it seems that foreign institutional investors (FPIs) who come to trade in the country do not think twice about reducing their income even modestly or diverting their money towards areas that seem to generate more income. In the last four months, foreign investors from Asian equity markets, such as Vietnam, Taiwan, South Korea, the Philippines, etc., have withdrawn a net 2.50 billion. Thus, there are indications that foreign investors are leaving emerging countries. It is no exaggeration to say that the stock market has survived as the Indian capital market has seen significant buying by domestic institutional investors in the face of massive selling of FPIs. However, as the purchases of domestic institutional investors are limited compared to FPIs, the situation in the stock market is dire for retail investors and their condition is likely to worsen if they do not die.

Our governments have been lukewarm towards FPIs to increase the inflow of the dollar into the country's capital markets. The purpose behind keeping this blessing can be considered to be to increase their presence in the country and keep the inflow of dollar in the country. Since the country's economic reforms began in the early 1990s, FPIs have been allowed to invest in the Indian capital market. The Khalikham treasury in the early 1990s resulted in a balance of payments crisis in the country. The FPI was invited to India to address the crisis.

Whatever the maths of governments behind the softening of FPIs, policymakers should not forget that foreign institutions invest here only to make money. Due to the inflow of foreign money, the Reserve Bank has been able to increase its forex reserves to over ૬ 200 billion. But in the case of FPI, forex does not seem to be declining significantly.

If the FPI continues to withdraw money from the country in the event of the US Federal Reserve withdrawing its relief program, the country's policymakers will have to be vigilant so that the country's financial situation is not disrupted. FPIs hold a large number of free-float or public-owned shares in the Indian market. India has the largest FPI investment in emerging markets such as Indonesia, the Philippines, Thailand and South Korea. Against this, the RBI has been increasing its forex reserves and maintaining them. However, to keep the rupee afloat against the dollar, the Reserve Bank has to intervene in the money market and sell its own dollars.

India is currently in a good financial position. Its current account position is also strong and the current financial year saw a surplus in the current account. The Reserve Bank has a level of forex reserves that can withstand external shocks, yet the government will have to come up with a medium-term fiscal plan in view of the announcement by the Federal Reserve chairman to prevent financial volatility in the event of any major shocks.