Scrapped 1000 rupee and 500 rupee notes have to be deposited by December 30. Photo/Reuters
Scrapped 1000 rupee and 500 rupee notes have to be deposited by December 30. Photo/Reuters

India’s shock announcement of demonetizing high value currency on November 8 and the subsequent mismanagement of new currency supply have taken a toll on foreign investment in capital markets and the situation was aggravated after the US announced policy changes.

The Indian Express daily, citing National Securities Depository (NSDL) data, said that foreign institutional investors had withdrawn 665.07 billion rupees (US$9.76 billion) in November and December and 51.45 billion rupees from the capital markets as of January 23.

The withdrawal of nearly 86% of currency from India’s heavily cash dependent economy had severely choked money supply to various sectors leading to a slowdown and steep job losses, especially in real estate and manufacturing.

Many ratings agencies and investment banks have downgraded their forecasts for India’s Gross Domestic Product growth for 2017 by 0.5% to 1%. The International Monetary Fund sees India losing its title as the fastest growing economy to China. In its forecast for the year, the IMF has lowered India’s growth by a full percentage point to 6.6%, against an earlier estimate of 7.6%, because of the disruption caused by demonetization.

The first advance estimates released by the Central Statistics Office (CSO) showed India’s GDP growth decelerating to 7.1% in 2016-17 (April-March) from 7.6% last year, primarily due to slowdown in manufacturing, mining and construction sectors.

In addition, Donald Trump’s inauguration as the 45th US President and rising interest rates in the world’s largest economy has also played a role in the withdrawal of foreign investors in India.

Trump’s rallying cry of “buy American, hire American” has unnerved India’s IT industry, which looks to the US for 60% of its exports. It is keeping a close watch on how the new administration evolves policies around outsourcing and the movement of skilled workers.

All these factors have made foreign investors tweak their investment strategy and look for other emerging markets.

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