SynopsisLast week’s decision to repeal the three farm laws is set to weigh on the currency and debt markets as the move could hurt overseas inflows. It’s likely to trigger volatility in the markets, sending the rupee lower against the dollar and bond yields higher unless other reforms rekindle global investor interest in Indian assets. Some analysts said equities may not be much affected.
Mumbai: Last week’s decision to repeal the three farm laws is set to weigh on the currency and debt markets as the move could hurt overseas inflows. It’s likely to trigger volatility in the markets, sending the rupee lower against the dollar and bond yields higher unless other reforms rekindle global investor interest in Indian assets. Some analysts said equities may not be much affected.
Corporate farming would have attracted private investments, helping North Block’s fiscal math.
“Certainly, there will be a negative impact on global investor sentiment,” said Ashhish Vaidya, managing director and head of markets, DBS Bank India. “Both the rupee and debt markets will miss the additional interest from international investors in the absence of the new farm laws implementation. Slowly, people will realise that in a democracy, it may take time and require adequate debate, discussions to change things.”
Prime Minister Narendra Modi said the farm laws will be repealed by Parliament. This follows protests by farmers that have lasted more than a year.
The backtracking on key reforms could deter some investors, experts said. India is the next global investment hotspot, according to a recent CII-Ernst & Young report.
Blow to Agri Investment Plans
“We have the potential to attract an annual FDI in the range of $120-160 billion by 2025,” industry and commerce minister Piyush Goyel said last week.
India attracted a record $25 billion in net foreign direct investment (FDI) during the September quarter. It got a net $14 billion from foreign portfolio investors (FPIs) in 2021. “The farm law would have made corporate farming a reality, increasing farmers’ income,” said Madan Sabnavis, chief economist at CARE Ratings. “Now, potential planned investments have to be held back affecting potential overseas inflows into India.”
Some companies interested in entering agriculture and allied sectors were said to have been planning new investments in collaboration with local and global partners. Those are unlikely to take place. Less than 2% of FDI goes to the food processing industry, which is around $1.2 billion in absolute terms. The new farm laws would have taken this to an estimated $10 billion in a year after implementation, according to experts. The US State Department had said in February that the new policies would attract greater private sector investment.
“While the rupee is likely to lose a key support from international inflows in the medium term, the debt market will miss any additional demand for borrowing from the agriculture sector, sending yields higher, particularly when the fear of inflation is looming large,” said Sabnavis.
Since September 20, the benchmark bond yield, a key gauge for the Centre’s market borrowings, has surged 21 basis points to 6.34%.
(Originally published on Nov 22, 2021, 06:46 AM IST)
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