Net FII inflows set to touch $40 billion
Mumbai: Foreign portfolio managers have pumped in almost $40 billion in Indian stocks and debt this year on expectations that economic growth will quicken and interest rates will be cut as lower oil prices cool inflation, making India the most attractive destination among emerging markets and in Asia excluding Japan.
Net foreign portfolio investments into debt and equities reached $39.38 billion, according to the latest official data available on Friday. National Securities Depository Ltd releases data with a one-day lag. The last time India saw such strong inflows was in 2010 when net investments had added up to $39.38 billion for the full year.
Foreign portfolio inflows into India are the second highest in the Asian region after Japan. China does not release exact data of foreign inflows.
"The entire environment has shifted towards improved policy environment, better decision-making, improving growth and declining inflation. The mix of growth inflation is getting better," said Shubhada Rao, chief economist at Yes Bank Ltd. "This clearly puts India on the top as far as BRICS (Brazil, Russia, India, China and South Africa) are concerned, and amongst emerging markets as well."
Investors are betting that Prime Minister Narendra Modi's government will usher in structural reforms such as the introduction of the goods and services tax to boost economic growth to rival China's scorching pace and cool inflation. The government expects gross domestic product (GDP) growth to accelerate to around 6-6.5% in the year starting 1 April. In addition, the recent slump in the price of crude oil, contributing to slower price gains, may also prompt central bank governor Raghuram Rajan to ease monetary policy earlier than expected, according to economists.
A greater proportion of the foreign portfolio inflows this year has been into the debt markets. Of the total, $23.74 billion has been invested in debt while the remaining $15.4 billion has gone into the equity markets. The year-to-date investment in debt is more than double the previous highest of $10.1 billion in 2010. Foreign institutional investors can invest a maximum of $30 billion in government securities with $5 billion of that reserved for long-term investors, according to Reserve Bank of India (RBI) rules.
Investments into debt picked up early in the year as global investors sought to take advantage of the higher yields in the Indian markets. In addition, measures taken to stabilize the rupee and an expectation that interest rates would start to decline attracted investors to the local debt market.
Most of these factors are expected to continue to draw foreign investors to India, said experts.
"Inflation is coming down, global commodity prices are softer and the buoyant equity market means we could see higher government revenues through divestment and likely telecom auctions, which means that the fiscal deficit target of 4.1% will be achieved this year," said Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd.
Krishnamoorthy noted that other emerging markets that are commodity-linked are going through a tough time, which makes India more attractive. Asia's third largest economy grew 5.7% in the quarter ended June, after posting a second straight year of sub-5% growth. The government expects the economy to grow at around 5.8% this fiscal year. At the same time inflation is expected to slow to near 6% by January, as targeted by the central bank.
"Globally, China has announced fresh liquidity measures, following Japan and Europe, which means any action by the US Fed (Federal Reserve to tighten liquidity) will be futile as of now. FIIs (foreign institutional investors) will continue favouring India till global liquidity continues to be easy, which could be until June when the US Fed is likely to take action," he added.
While FIIs have almost reached their $25 billion limit on direct holdings of government debt, reports suggest that they have started to increase investments in debt-focused domestic mutual funds as a way to circumvent the limits.
On Friday Reuters, citing an unidentified senior policymaker, reported that worried by potentially destabilizing hot money flows, RBI could take action if foreign investors pour excessive amounts into mutual funds to bypass limits on ownership of government debt.
On the equity side, net inflows of $15.4 billion so far this year have helped push the benchmark Sensex up by 33.8%. BSE's benchmark index closed nearly 1% higher on Friday at a record closing high of 28,334.63 points.
"There has been a considerable amount of reallocation happening in favour of emerging markets from developed markets in the last few years, and India has been a substantial gainer. Given the overweight position of India, the allocation towards equities has been disproportionately large as compared to debt in the last few years," said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.
"The ability of FIIs to increasingly allocate their exposure is breaching limits, and that might be a bit of a constraint," he said, adding that Indian markets have enough support currently from domestic institutional investors as retail investors are actively deploying their money into mutual funds.
In the Asian region, Indian equities have attracted the highest interest compared with their regional peers so far in 2014. Japanese shares rank second, having attracted nearly $15 billion for the year to date.
"The risks, though, are if the US tightens the monetary policy, and whether the emerging markets such as India deliver on economic growth as expected, and outshine the developed economies," Sinha said.
Indian shares have been major recipients of foreign inflows over the years. Since 1999, Indian equities have attracted a net of $152.93 billion.
"We will continue to see robust inflows from FIIs," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd, a Mumbai-based brokerage. "The worst seems to be over for economic growth. We are going to look up on GDP, starting 2016-17 for four-five years at least. If that is the case, we are in for robust economic growth and earning expansion."
The strong foreign inflows are likely to help strengthen the country's fundamentals on the external front by ensuring a balance of payments surplus and also helping to build reserves.
In the first half of this fiscal year, RBI bought $16.68 billion from the spot currency market, while an additional $8.42 billion was bought through forward contracts. This has helped boost foreign exchange reserves to $315 billion as on 14 November.
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Net foreign portfolio investments into debt and equities reached $39.38 billion, according to the latest official data available on Friday. National Securities Depository Ltd releases data with a one-day lag. The last time India saw such strong inflows was in 2010 when net investments had added up to $39.38 billion for the full year.
Foreign portfolio inflows into India are the second highest in the Asian region after Japan. China does not release exact data of foreign inflows.
"The entire environment has shifted towards improved policy environment, better decision-making, improving growth and declining inflation. The mix of growth inflation is getting better," said Shubhada Rao, chief economist at Yes Bank Ltd. "This clearly puts India on the top as far as BRICS (Brazil, Russia, India, China and South Africa) are concerned, and amongst emerging markets as well."
Investors are betting that Prime Minister Narendra Modi's government will usher in structural reforms such as the introduction of the goods and services tax to boost economic growth to rival China's scorching pace and cool inflation. The government expects gross domestic product (GDP) growth to accelerate to around 6-6.5% in the year starting 1 April. In addition, the recent slump in the price of crude oil, contributing to slower price gains, may also prompt central bank governor Raghuram Rajan to ease monetary policy earlier than expected, according to economists.
A greater proportion of the foreign portfolio inflows this year has been into the debt markets. Of the total, $23.74 billion has been invested in debt while the remaining $15.4 billion has gone into the equity markets. The year-to-date investment in debt is more than double the previous highest of $10.1 billion in 2010. Foreign institutional investors can invest a maximum of $30 billion in government securities with $5 billion of that reserved for long-term investors, according to Reserve Bank of India (RBI) rules.
Investments into debt picked up early in the year as global investors sought to take advantage of the higher yields in the Indian markets. In addition, measures taken to stabilize the rupee and an expectation that interest rates would start to decline attracted investors to the local debt market.
Most of these factors are expected to continue to draw foreign investors to India, said experts.
"Inflation is coming down, global commodity prices are softer and the buoyant equity market means we could see higher government revenues through divestment and likely telecom auctions, which means that the fiscal deficit target of 4.1% will be achieved this year," said Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd.
Krishnamoorthy noted that other emerging markets that are commodity-linked are going through a tough time, which makes India more attractive. Asia's third largest economy grew 5.7% in the quarter ended June, after posting a second straight year of sub-5% growth. The government expects the economy to grow at around 5.8% this fiscal year. At the same time inflation is expected to slow to near 6% by January, as targeted by the central bank.
"Globally, China has announced fresh liquidity measures, following Japan and Europe, which means any action by the US Fed (Federal Reserve to tighten liquidity) will be futile as of now. FIIs (foreign institutional investors) will continue favouring India till global liquidity continues to be easy, which could be until June when the US Fed is likely to take action," he added.
While FIIs have almost reached their $25 billion limit on direct holdings of government debt, reports suggest that they have started to increase investments in debt-focused domestic mutual funds as a way to circumvent the limits.
On Friday Reuters, citing an unidentified senior policymaker, reported that worried by potentially destabilizing hot money flows, RBI could take action if foreign investors pour excessive amounts into mutual funds to bypass limits on ownership of government debt.
On the equity side, net inflows of $15.4 billion so far this year have helped push the benchmark Sensex up by 33.8%. BSE's benchmark index closed nearly 1% higher on Friday at a record closing high of 28,334.63 points.
"There has been a considerable amount of reallocation happening in favour of emerging markets from developed markets in the last few years, and India has been a substantial gainer. Given the overweight position of India, the allocation towards equities has been disproportionately large as compared to debt in the last few years," said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.
"The ability of FIIs to increasingly allocate their exposure is breaching limits, and that might be a bit of a constraint," he said, adding that Indian markets have enough support currently from domestic institutional investors as retail investors are actively deploying their money into mutual funds.
In the Asian region, Indian equities have attracted the highest interest compared with their regional peers so far in 2014. Japanese shares rank second, having attracted nearly $15 billion for the year to date.
"The risks, though, are if the US tightens the monetary policy, and whether the emerging markets such as India deliver on economic growth as expected, and outshine the developed economies," Sinha said.
Indian shares have been major recipients of foreign inflows over the years. Since 1999, Indian equities have attracted a net of $152.93 billion.
"We will continue to see robust inflows from FIIs," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd, a Mumbai-based brokerage. "The worst seems to be over for economic growth. We are going to look up on GDP, starting 2016-17 for four-five years at least. If that is the case, we are in for robust economic growth and earning expansion."
The strong foreign inflows are likely to help strengthen the country's fundamentals on the external front by ensuring a balance of payments surplus and also helping to build reserves.
In the first half of this fiscal year, RBI bought $16.68 billion from the spot currency market, while an additional $8.42 billion was bought through forward contracts. This has helped boost foreign exchange reserves to $315 billion as on 14 November.
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