BE/RBI NOTE/17/2018
Volatility of Hot money flow is envisaged with the recent actions initiated by the Central Bank (Reserve Bank of India) in attracting the foreign buyers in investing in the Indian Debt Market. The crux of the issue is as under:
Causes:
- RBI lifted a restriction limiting foreign investors in buying of bonds of three years or more maturity.
- RBI also gave the foreign investors right of entry to short term sovereign treasury bills.
- Meanwhile the Government bonds failed at a greater financial cost, and could not attract many investors. Thus the permission accorded by RBI was obviously mistimed.
- Additionally the monetary policy meeting of RBI brought fears in the minds of investors, about a possible hike in interest rates.
- New rules have brought a fear of an inflow of BOND TOURISTS, coupled with a rapid fire switching in and out of short term debt by foreign traders.
- This sort of volatility in the bond market could make India’s financial market more vulnerable more so when the rupee is performing very badly.
- Oil prices are at a peak which has resulted in current account deficits.
- Interest rates could go high due to the fear of an increased inflation risks.
Effects:
- It encourages more short term inflows
- Possibility of India being exposed to more hot money flows and volatility in the long run
- Foreign have sold a net $240.92 million of bonds in the first week of May this year, which has brought serious concern.
NOTE:
Hot money is the currency that moves regularly, and quickly, between Financial Markets. Here, investors ensure they are getting the highest short-term interest rates available. Hot money continuously shifts from countries with low-interest rates to those with higher rates. The financial transfers affect the exchange rate if there is a high sum and also potentially impact a country’s balance of payments.
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