Will FPI money return to Indian shores in Samvat 2079? BT Digital Diwali Survey decodes

Domestic stocks avoiding the bear assault that the US and markets globally have suffered has been one of Samvat 2078's defining trends. The 'decoupling' as analysts refer to it as, however, lacked global support.

Foreign portfolio investors (FPIs) have dumped roughly Rs 2,00,000 crore worth of domestic stocks since November 2021.

No, India has not lost the 'fastest growing major economy' tag. In a world where inflation in developed economies is at four-decade highs, something unheard of, a flight to safe haven dollar was a given.

But will FPIs make a strong comeback now? It's highly unlikely in near future, according to analysts participating in the BT Digital Diwali Survey, even as they hope Samvat 2079 will not be as bad as 2078.

"With inflation still a large cause of the problem for the global economy, we are not anticipating central banks to go easy on policy in near future. US bond yield around 4-4.5 per cent gives great comfort to FPIs to park money in bond markets. This may limit allocation into equities as investment in debt may provide better risk adjusted returns," said Siddarth Bhamre, Head of Research at Religare Broking.

However, within equity allocation, Bhamre expects India may see increased weightage due to its sound macro-economic situation.

Sanjay Chawla, CIO- Equity at Baroda BNP Paribas Mutual Fund said FPI flows may remain volatile in coming months as fast-evolving global dynamics and consistent repricing of Fed’s massive hikes are indirectly pressing their assets to offer higher risk premia to the world.

"India has not been spared here. We do not believe that either the equity drawdown or valuations have reached levels consistent with the type of potential recession, implying that risk assets are yet to see their cyclical lows," Chawla said.

Ironically, while 2023 may deliver a recession, it may also provide broadly positive returns across risk-asset classes as 2022 is expected to have front-loaded most of the recession risk into valuations, Chawla said.

"Thus, mid 2023 could be a good period of risk reversal, assuming the impending global/US recession by mid-2023 turns out to be shallow," he said.

Surjitt Singh Arora of PGIM India PMS said FPI flows could remain volatile during the first half of 2023, given the higher interest rate and the geo-political situation globally. But once there is enough evidence that the central bankers across the globe have been successful in controlling inflation, there is a possibility of a pause/reversal in the interest rate cycle.

"In such a scenario, FPIs can stage a strong comeback in the domestic market, given that Indian economy would still be the fastest growing economy in the world," Arora said.

Neeraj Chadawar of Axis Securities said flows in near term could be volatile in emerging markets till the time the dollar index stabilises.

"Once the volatility and further appreciation of the dollar settle down in H2CY22, the overall fiscal deficit will play out, FIIs will regain confidence in emerging markets. This will be especially true for India as strong earnings growth, and economic recovery will play out for CY23," he said.

Vinit Bolinjkar, Head of Research at Ventura Securities, said while FPI flows are difficult to predict, he expects them to be volatile and should stabilise only in 2024.

The rate hikes by the US Fed have pushed the dollar up against the rupee. This coupled with the crude prices has impacted our current account deficit. The FIIs usually shy away from such economies, said Sumit Chanda, Founder and CEO of JARVIS Invest.

"The rate hikes have also led to a spike in their treasury yields. The 2-year US Treasury, which is currently trading at 4.4 per cent level is a far safer bet for FPIs than any emerging market. As and when the central banks take their feet off the rate hike pedals, we can expect things to normalise and FIIs will start showing renewed interest in our markets," Chanda said.

Meanwhile, a few experts are hopeful.

Deepak Jasani of HDFC Securities said FPI flows into India might be better in the coming Samvat compared to the last one. Incremental negative reaction to news flow may not be as large in future by the FPIs as in the past, he said.

Mohit Nigam of Hem Securities believes with India’s long-term story intact and strong fundamentals, the FIIs will pour back funds in the economy in the medium-long term.

"If we assume that central banks around the world ease up on rate hikes, we may see an increase in flows, as they appear quite positive, given that oil prices will stabilise and interest rates will flatten," said Deepak Singh of Reliance Securities.

Shrikant Chouhan of Kotak Securities expects the trend to reverse, but only after a couple of months.

"Foreign investors turned jittery and emerged as net sellers in September and first half of October, as a rise in the US 10-year bond yield and a strong dollar index pushed FPIs to exit emerging markets. We expect the trend to continue for the next three months and post that we can see a reversal," he said.

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