Foreign Institutional Investors have been permitted to operate in the Indian stock market since 1993, after the globalization of Indian economy, in 1991. During October 2009, FIIs purchased shares for about Rs.75,000 crores or about US$ 15 billion. They will sell these shares only when they will make a decent profit of say 10% or so or when they can make better profit elsewhere. Assuming that they are satisfied with 10% profit, the country would lose foreign exchange of US$ 1.5 billion on their purchases during Oct. For a year, the net foreign exchange outflow would be about US$ 18 billion. Even if it is only US$10 billion, this is a substantial amount considering that India already has a large foreign trade deficit. India’s exports during 2009-10 may come to about US$ 150 billion and imports to about US$ 240 billion leaving a huge deficit of about US$90billion.
Not only this. The Indian foreign trade community faces uncertainties in exchange rates. When FIIs are net purchasers, the rupee appreciates and the exporters stand to lose, though the importers stand to gain. When FIIs are net sellers, the rupee depreciates and the importers have to pay more in rupee terms, for no fault of theirs.
In return for the disadvantages in allowing free capital movement from and to other countries, the country has not been able to secure free movement of professionals (of course professionals do move to other countries but not as freely as the capital from other countries). India is mainly a manpower/professional exporting country and not a capital exporting country. It is time to have a review of the need to allow the FIIs to operate and place more restrictions on the volume of their transactions.