FDI may decline 20% in FY22, trend to weigh on rupee: UBS

Slowdown follows ‘very strong’ inflows in services sector in second half of 2020

India’s FDI inflows may dip by about 20% this year after the all-time high investments of close to $82 billion received in FY21, a UBS Global research report said on Thursday.

“India’s net FDI inflows have slowed in the first half of calendar year 2021 after very strong FDI inflows in the second half of 2020,” UBS said in the report. “The latter was due to the services sector, which continues to dominate FDI inflows, with e-commerce and digital platforms the new wave, while manufacturing has lagged,” it added.

“We see risk of FDI inflows declining by about 20% year on year, in 2021-22 — which could weigh on the rupee near term — before recovering in 2022-23 and beyond,” UBS economists said in a report titled ‘Asian net inward FDI on track for a record year — what happens next?’

Net FDI inflows in India are not expected to fully offset the country’s current account deficit this year, but the reshoring of supply chains due to the pandemic is a ‘relative positive’ for more investments into India, the report suggested. FDI inflows in the first half of this year stood at about $31 billion.

“It appears that the reshoring dynamic is impacting South Asian economies less than China,” it pointed out. Asia is expected to receive the highest FDI this year, going well past the previous record net inward FDI of $252 billion in 2013.

UBS economists expect FDI inflows into India to increase to about $85 billion by FY26 and rise to almost $100 billion over five years.

“We think India’s absorptive capacity is significantly larger than some peers’. Recent reforms include incentives for manufacturing, easier labour laws and privatisation, which should support long-term growth closer to our upside scenario of 7.5-8% and could help boost FDI inflows to about $100 billion over the next five years.

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