FPI Investments

Why are Foreign Investors flocking back to India once again…?

FPIs have infused nearly $2 billion into the Indian markets during the month of July. Of course, half of these inflows were into debt but that still does not take away from the fact that India is surely attracting FII interest. There are 3 key reasons why India is seeing a spate of FII flows in the month of July.

FPIs are back to risk-on…

As the US appeared to adopt a hawkish tone, the clear preference of global investors seemed to be the risk-off trade. The safety of US Treasuries and even the negative yield of European bonds were good enough for investors seeking safety. A lot has changed since then. The BREXIT vote has raised serious questions over its implications for the EU and the UK. While estimates vary, there seems to be a consensus that both the regions will face a GDP contraction to the tune of 3-4 percentage points over the next few years. That is not great news for the US Fed as it cannot pursue its hawkish strategy any longer. Weak growth in the UK and EU will mean weak demand for oil. If oil continues its fall below the $50/bbl mark, then inflation goes out of the US Fed’s comfort zone. The indications are that Fed rate hikes may be off the radar at least till the end of 2016. That provides a strong justification for global investors to adopt a more risk-on approach to investing. With negative yields globally, India is an obvious magnet for FPI flows.

Stable rupee is an added plus…

 One of the big achievements of the RBI governor over the last 3 years has been a calibrated management of the rupee. While the rupee has still depreciated, that is more due to overvalued REER. We no longer get to see the spasmodic movements in the INR as was visible in 2013. That gives a lot of comfort to global investors, especially the debt investors. With the RBI not conceding to rate cut demands, the effective yield gap with the US markets has also been maintained. A calibrated rupee means that the FPIs do not need to really fear about currency wiping out their real yields on debt. That has been a key trigger for FPI flows in July.

There is a fundamental story too…

To be fair, the FPI flows are not just indicative of risk-on trade and a calibrated rupee. There is also a very fundamental game at play. India is likely to add $1 trillion of GDP in the next 4 years. The big beneficiary of this big-bang expansion will be Indian companies, especially the mid-cap and small-cap ones. Additionally, the last 2 quarters have been reflective of marginal growth in sales but a sharp growth in profits and margins. This is a direct outcome of the dividends of cheap oil and commodity prices. It appears that the FPI flows are here to stay. It could be the beginning of a major re-rating for Indian markets. ©

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