How foreign investors control your financial future

The sun was setting over the Worli Seaface. The cars were getting noisier. The walkers were walking faster on the promenade, with earphones on, to cancel out the city that they lived in.

And this is when I saw her. After eight years. She had changed in a good way.

I was trying to avoid her, when she came and stood right in front of me and asked: “How are you V?” “I am good,” I replied, not knowing what else to say.

“So, why don’t we start where we left?” she asked.

“For sure,” I replied, and eight years went away in a jiffy.

“I have been reading about these foreign investors, pulling out of our financial markets.”

“That’s right,” I said trying to keep it short.

“Come on, why don’t you explain in a little more detail,” pulling her hair back, like she often used to, in our day.

“Well, since the beginning of April, foreign institutional investors, have sold out stocks and bonds worth Rs 44,042 crore.”

“That’s quite a lot of money.”

“Yup. They have sold stocks worth Rs 13,354 crore and bonds worth Rs 30,688 crore.”

“And?”

“Between April 2009 and March 2018, the foreign institutional investors bought stocks and bonds worth a total of Rs 10.55 lakh crore. In fact, only in 2015-2016, they sold stocks and bonds worth Rs 18,176 crore.”

“And they have bought in all other years?” she asked.

“Yes,” I replied. “In fact, in 2017-2018, they bought stocks and bonds worth Rs 1,44,682 crore.”

“So, what has changed since April?”

“Well, for that I will need to give you some historical background.”

“Sure, why don’t you that,” she said pulling me towards one of the many benches that lined up the promenade.

“In September 2008, Lehman Brothers, the fourth largest investment bank on Wall Street went bust. This was followed by many big financial institutions in the Western world, almost coming to a standstill.”

“Of course, I remember discussing all that with you in 2008,” she replied with a huge smile on her face.

“The Western economies including the American economy went into a tailspin. In order, to revive economic growth, the Western central banks led by the Federal Reserve of the United States, started to print money.”

“Oh yes, I remember that!”

“The idea was to flood the financial system with money and drive down interest rates. At lower interest rates people would borrow and spend more, and companies would borrow and expand.”

“Did that happen?”

“Not to the extent it was expected. The consumers were just coming out of one round of a borrowing binge. The companies used low interest rates to borrow money to buyback their shares, and push up share prices as a result.”

“Oh!”

“Yes. And the big financial investors, started borrowing money at low interest rates and investing it in stock markets and bond markets, all over the world.”

“Which is why so much foreign money has come into India, over the years?” she asked.

“Yes. And now that money is going away because the Federal Reserve wants to gradually start sucking out all the money that it has printed and pumped into the financial system.”

“So?”

“That has started to push up interest rates. At higher interest rates it does not make sense for foreign investors to borrow and stay invested in stock and bond markets in India. And that’s why they are selling out.”

“Now that makes sense,” she said. “But given that foreign investors have been selling out, why hasn’t the stock market fallen, as much?”

“Well, right now, I am in a hurry,” I replied. “If you want an answer to that, we will have to meet again.”

“How about tomorrow evening?” she asked.