Interest rates no more affect the capital inflows: RBI Study

Posted By: Religare
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Interest rates do no affect capital inflows
Reserve bank Study (RBI) study says that the effect of change in interest rates in the country hardly affects the capital inflows in the country. Economic theories say that when the interest rates in the country rises then it became quite attractive for foreign investors to invest in that country as they will get better returns. But RBI study seems to defy this as far as it considers the case of India.

Study says that 100 basis points rise in the interest rates results in only 5 basis points increase in the capital inflows in India. RBI says that Foreign Direct Investment (FDI) are for long term investments and that rises only when foreign investors are confident enough on the growth of economy.

As far the case of Foreign Institutional Investment (FII) is concerned, RBI found a positive relation between stock market and FII's inflow. It says that a 1 per cent rise in Sensex results in a 1.3 per cent rise in cumulative FII inflows in the stock market.

RBI also stated that few of the other reason that attracts inflows to the country are domestic industrial and economic activity, stock return, performance of other advanced economies and overseas investors' risk perception.

RBIs policy review meeting is scheduled on June 16. Considering the above observations, RBI feels that tightening the monetary policy may slow down the net capital inflows in the country.

Read more about: economy, rbi, fii, stock market, sensex
Story first published: Wednesday, June 8, 2011, 14:30 [IST]
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