Foreign funds flow into India is expected to face headwind over the near-to-medium term despite the accommodative global monetary policy stance and rolling back of tax surcharge on FPIs by the government, said India Ratings on Wednesday.
"A gamut of factors, such as slower-than-expected demand growth in major economies, geopolitical and trade tensions and a gradual weakening of the economic growth prospects in India have contributed to a build-up of risk aversion, which has impeded the demand for emerging market debt instruments," India Ratings (Ind-Ra) said in a report.
Foreign investors have been on selling spree in the Indian market amid uncertainty over FPI tax and global trade worries. Finance Minister Nirmala Sitharaman in her maiden Budget levied the tax surcharge on Foreign Portfolio Investors (FPIs), which led to fund outflows of Rs 8,319 crore on a net basis in the first half of August. In July, FPIs had pulled out Rs 2,985.88 crore from the Indian capital markets (both equity and debt).
According to Ind-Ra, China would continue to crowd out capital flows to emerging markets like India and consequently, FPI inflows would remain under pressure.
While India might occasionally experience pockets of inflows, global capital inflows are unlikely to pick up sustainably, the agency noted.
Ind-Ra opined that the shift in global monetary policy conditions to a relatively accommodative stance is unlikely to revive capital flows into emerging markets like India.
"Despite the US Fed's decision to restrict the contraction of its balance sheet and the European Central Bank's (ECB) decision to conduct a fresh round of targeted long term refinancing operations (TLTROs), Ind-Ra expects the cumulative liquidity infusion by the four major central banks (US Fed, ECB, Bank of England and Bank of Japan) in 2019 to be significantly low."
The cumulative liquidity infusion by the four major central banks will be around $186 billion compared with the infusions of $353 billion and $1.45 trillion in 2018 and 2017, respectively, it added.
Given the continued slowdown in economic activity, the agency expects combined market borrowings of nearly Rs 6.35 lakh crore by the central and state governments between September 2019 and March 2020.
Edited by Chitranjan Kumar