Foreign investment is one of the important components of India’s capital/finance account of balance of payments. During 2016-17 (April-December), the current account deficit of US$ 11.6 billion was more than covered by the net capital inflows of US$ 25.9 billion resulting in the accretion of foreign exchange reserves of US$ 14.2 billion. Of this, net foreign investment inflows were US$ 27.4 billion. FDI, a more stable component of capital inflows increased to US$ 30.6 billion in 2016-17 (April-December) from US$ 27.2 billion in the corresponding period of the previous year.

During 2016-17, the Indian rupee depreciated by 2.4 per cent and by 1.8 per cent against the US dollar and Euro and appreciated by 12.6 per cent against the Pound sterling. However, in February and March 2017 the rupee appreciated against all the above three currencies with significant capital inflows, both portfolio and FDI. Net FII flows picked up significantly since February 2017 after turning negative during the period October 2016-January 2017. FDI inflows also continued to be robust during 2016-17 (April-January).

Positive sentiment generated by good growth prospects of the Indian economy, sound macroeconomic fundamentals with low inflation, low current account deficit, adequate forex reserves, etc. are driving capital inflows contributing to the strengthening of the rupee.

This was stated by Shri Arjun Ram Meghwal, Minister of State in the Ministry of Finance in written reply to a question in Lok Sabha.

Capital inflows strengthen the rupee following renewed FDI and portfolio investment and improved macroeconomic fundamentals recently. Rupee appreciation in February-March 2017 followed significant capital inflows-both portfolio and FDI-with net capital inflows more than covering the current account deficit and increasing foreign exchange reserves. Net foreign investment inflows were sizable in 2016-17 and FII flows recovered since February after an earlier negative phase; FDI inflows remained robust. The strengthening of the rupee is attributed to investor confidence arising from favourable growth prospects and stable macroeconomic fundamentals such as low inflation, a contained current account deficit and adequate forex reserves.