The month of March has been a hectic month in terms of FPI flows. In the first 14 trading sessions of March, FPIs infused nearly Rs.18,000 crore into equities on a net basis. This is in stark contrast to the withdrawal of Rs.80,000 crores by FPI between October 2016 and January 2017. This was the combined selling figure for equity and debt put together but it is still a fairly large number. The question, therefore, is whether the March FPI numbers are representative of a shift in sentiment or merely a one-off trend…
While one needs to watch the data for a little longer, there are some strong reasons why we could see the FPI sentiments change for the positive. Here are 8 such reasons why we believe that FPIs may once again show renewed interest in investing in India…
Why the March FII numbers above could signify revival in FPI interest in India…
- The Fed meet outcome on March 15th could be a key trigger for the return of FPI flows into India. While the actual minutes and discussion are awaited, the meet broadly hinted at 2 more rate hikes this year. That is far lower than what the markets were expecting and that will ensure that a good chunk of FPI money that was waiting in the sidelines will not return to emerging markets like India in search of Alpha. This could be a major trigger with respect to FPI flows, especially into the debt markets.
- The recent Fed decision also needs to be juxtaposed with the RBI outlook for rates. The Monetary Policy Committee (MPC) in its last meeting had shifted the focus of policy from accommodative to neutral. That implied that the era of further rates was over. This will do away with the risk that the yield differential between India and the US will be too high. For FPIs higher rates with growth is preferable to lower rates with low growth.
- Demonetization was one of the key reasons for the surge in outflows from India. Most FPIs were apprehensive that the liquidity crunch caused by demonetization could seriously hamper growth. But the actual impact on growth was quite minimal with the impact on GDP growth being less than 0.5%. Even that promised to be a temporary impact. The expected disruption to output due to demonetization was actually elusive.
- FPIs are realizing that if the demonetization was not so bad then remonetization that began in January could have a higher than expected positive impact on growth. This is already evident in Q4 projections. With banks flush with funds and lending rates much lower, the multiplier impact on growth could be much more positive than expected. This is obviously a game that the FPIs would want to play as the economy stands on the cusp of growth.
- Economic reforms seem to be on track, especially after the success of the BJP in the UP election. In fact, the BJP performed much better than expected. They swept UP and Uttarakhand and managed to cobble a government in Manipur and Goa. That indicates continuity for economic thinking and certain stability to the reforms process. It will also mean that the government will not have to resort to populist measures to woo the people of India.
- But, the much bigger takeaway could be that the thumping victory could give the BJP much greater clout in the Upper House by 2018. Unlike in the past, when the opposition was stalling the GST Bill in parliament, they would be more measured now considering that the scenario is likely to change in 2018. Hence one can safely expect some crucial reforms pertaining to labour reforms, land reforms and FDI go through smoothly.
- FPIs are also playing catch-up on the INR. Most FPIs expected the INR to weaken further to the 72/$ levels. Hence they preferred to wait on the sidelines. With the rupee sharply appreciating back to the 65.50/$ levels, there is a left-out feeling among the FPIs. They also realize that, notwithstanding the REER overvaluation, the INR may continue to remain strong. This may spur FPIs to go aggressive on Indian equities.
- Lastly, as FPIs try to bet on alpha with currency protection where else do they look for? The answer is India. With 7.5% GDP growth, a vast consumer market and the dividends of cheap oil, the Indian economy is perched on a sweet spot. FPIs are clear about the potential that India has to generate alpha in their portfolios. But above all, FPIs are also confident that the INR will remain strong or, even in a worst case scenario, the downward movement will be calibrated as the RBI has been managing. That gives tremendous predictability and comfort to FPIs proposing to invest in India.
The FPI numbers in March may not be a flash in the pan but it may be indicative of a larger trend shift in FPI thinking with respect to investing in India. If that materializes, the Nifty and the Sensex will surely have a lot to celebrate about!
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