Panic about India’s FPI inflows

Interestingly, this comes at a time when India was expected to potentially benefit from regulatory crackdown on Chinese technology firms. For emerging market stocks, including India, which are high on the Covid-led stimulus, inflow of foreign funds is paramount. This is all the more important now, given that US Federal Reserve Chairman Jerome Powell has indicated that it may be appropriate to start easing asset buying momentum this year. This, along with a simultaneous rise in the US Treasury yield, creates a perfect storm that could drive the dollar out of emerging markets, including India.

But experts aren’t too upset right now. For one, the Fed’s ambiguity on the tapering timeline has given equity markets reason enough to continue their binge. Plus, this time around, the Fed’s gap between raising rates and slashing asset purchases means the low-cost fund benefits for corporates are here to stay for some more time. After all, the cheap cost of borrowing has played a key role in driving this market rally, despite weak fundamentals. Second, the delta version of the virus poses a threat and leaves the outlook for recovery a bit uncertain, even as the US economy is on a recovery path.

Aishwarya Dadhich, a fund manager at Ambit Asset Management, said, “Of course tapering is a major concern, but a part of it is already covered. We do not see serious FPI outflows when the actual timeline is announced; India as compared to 2013 Better prepared now.”

To be sure, the outlook for primary market FPI inflows is upbeat, given that initial public offerings (IPOs) of several firms and unicorns are lined up in the coming months.

It is also comforting that India’s external macro is relatively strong. “The current account is in surplus, forex reserves are close to an all-time high, and the rupee does not look overvalued. One consequence of this is that the RBI will not be in a hurry to tighten monetary policy,” said Capital Economics’ Aug 25 stated in a report.

While India’s Q1FY22 GDP growth was marginally lower than forecast, economists expect a rapid revival in the coming days. High-frequency data for July and August showed that the recovery was gaining momentum. Certainly, the bigger risk to further development is the potential third wave that could affect the country.

For now, these factors, coupled with a better COVID outlook, increasing immunization pace and expectations of solid economic and earnings recovery, augurs well for Indian equities. The Nifty 50 index has climbed up to 24% so far this calendar year. According to Dadhich, “Given the paucity of investment options, DII money in equities is here to stay.”

Still, India’s valuation is expensive. Analysts at Jefferies India Pvt Ltd in a report on September 3. Ltd. said, “The premium of Nifty on EM and XJ (excluding Asia, Japan) indices has reached an all-time high of 68%/50% as compared to an average of 37% and 25% respectively. We also find That our preferred valuation gauge of the yield gap (1/pe less 10-year G-sec yield) has risen to a high of 165 basis points (bps) against the long-term average of 95 bps.” One basis point is one hundredth of a percentage point.

While some analysts are of the view that valuations of the Indian market are likely to remain costly, others are cautious. True, the costly valuations and the risk of being short mean that the risk to equities is high. Besides, delays and lack of meaningful recovery in corporate earnings could also dampen investor sentiment in the medium term. It is worth noting that the earnings upgrade for this financial year (FY22) and next was lower following the June quarter results. To justify such a rich valuation, earnings have to make a solid return.