Twitter
Advertisement

Is hot money fuelling the Indian market rally?

Latest News
article-main
FacebookTwitterWhatsappLinkedin

The BSE Sensex climbed to 27,211 Monday. It was around 23,171 the same time last year.

Marketmen were quick in predicting that it would cross 30,000 before the next Union Budget to be announced in March 2015.

The Nifty too climbed to an all time high of 8115 a day before.

Market pundits reel off several reasons. The most important is that the markets still believe that good days are just round the corner ("Achchhe din aane wale hain"). They also point to the revival in GDP growth rates, the clear indications of a rise in the Index of Industrial Production (IIP) and the monsoon not turning out to be as bad as was earlier expected.

But talk to economists and they believe that the inflow of money into the stock markets could have a lot to do with hot money.

They believe that the pact that 47 countries signed in May this year could be the most important factor spurring the inflow of foreign funds into this country. It may be recalled that thanks to tremendous pressure from the US, the OECD countries finally ratified a declaration which 47 countries became signatories to.

Under the declaration, the countries have committed to "swiftly" pass new domestic laws that will allow them to collect information on all bank accounts and automatically exchange it with other participating countries. They must also call on their financial centres "to implement the new single global standard without delay".

The list of signatories includes all 34 members of the OECD. That includes tax-haven countries like Switzerland, Liechtenstein and the British jurisdictions of Jersey and Guernsey – all which have been criticised for abetting tax evasion with their high level secrecy surrounding banking transactions and laws. The OECD has also secured the participation of 18 non-OECD nations, including the key international financial centre of Singapore. India too is a signatory to this declaration.

Accordingly, almost every major account holder, who has a US citizenship, has already been asked by the Swiss Banking authorities to immediately take measures to close their accounts with their banks, failing which they will be left with no alternative but to disclose the names of the end beneficiaries of such accounts. The deadline for making end beneficiary disclosures mandatory is 2017.

Indian holders of illegal money in overseas banks are in a funk. They know that if they do not disclose the end beneficiaries to the banks overseas, they run the risk of having all their money forfeited by the banks/home governments. That is why when the UPA was in power these account holders made a desperate bid to get a Voluntary Disclosure Income Scheme (VDIS) passsed – even if it meant a 50% penalty. A loss of 50% is better than a 100% confiscation, they rationalised (http://www.dnaindia.com/money/report-lobbying-for-financial-amnesty-grows-desperate-1987267).

Now, with no VDIS likely to be announced, many such account holders are desperately trying to 'purchase' legitimate income sources overseas and are bringing the money back in either as foreign institutional investments (FII) or even foreign direct investments (FDI). That could explain the surge in forex inflows into India.

The fact is that Indians account for a huge amount of ill-begotten money overseas. Figures range between $462 billion and $1.4 trillion. A sample computation can be found in the Global Financial Integrity's report published in December 2013. Another computation can be found in the DNA report referred to above.

True, the fall in oil prices has helped India's financial underpinnings. But the surge in inflows is unmistakable. Many believe that this inflow will get a lot stronger as the deadline of 2017 begins to hurtle closer.

Even if the government does not succeed in bringing in the black money, the declaration of May 2014 is actually making this possible.

This is one reason why marketmen believe that very soon the euphoria in the stock markets will spill over to gold and even to the beleaguered real estate sector. Will that actually happen? Keep watching the indices.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement