Govt's surcharge rollback fails to curb FPI selling spree, say experts

The rollback of the tax surcharge on foreign portfolio investors (FPIs) has failed to curb their selling spree, and they have offloaded equities worth more than Rs 4,000 crore since Monday.  

Experts say concerns about a slowdown in the domestic economy, combined with fears of a global recession, have eclipsed the move to withdraw the surcharge.

“The immediate reaction of the market to the announcement has been a tad underwhelming. But this could largely be attributed to the slowdown in the economy, not to mention volatility in global markets,” said Bharat Iyer, head of India equity research at JP Morgan.

The inversion of the yield curve in the US bond market has stoked concerns of a global recession. During the week, the yield on the two-year US treasury notes moved 5.3 basis points higher than that on the 10-year government bond, which was the largest gap since March 2007. Market analysts say these could be early signs of the trade tensions between the US and China taking a toll on global growth.

Back home, FPIs have sold Rs 861 crore worth of equities per day, on average, in August — 50 per cent higher than the previous month’s average. Average FPI selling in the last four sessions, after the reversal of the surcharge move on Friday, has been over Rs 1,000 crore (including Thursday’s provisional data).

Overall, FPIs have sold more than Rs 27,000 crore worth of equities since the surcharge was announced on July 5. However, experts say selling could have been worse if not for the decision to roll back the move. “The rollback of the surcharge is a good move and has been appreciated by foreign investors. If it had stayed, foreign investors’ return expectations would have increased to factor in the increased tax rate,” Iyer said.

Analysts feel the announcements made by the government on Friday have been inadequate. Shankar Sharma, co-founder and chief global strategist of First Global, said, “The only way to bring back investor confidence is to revive economic and corporate growth. On the margin, making tax rates more favourable is a big help.”

On Wednesday, India Ratings downgraded India’s growth forecast. The rating agency expects India’s 2019-2020 growth to tumble to a six-year low of 6.7 per cent, as against the earlier estimates of 7.3 per cent.

On the global front, tensions between the US and Iran, and fears of a messy Brexit have dampened investor sentiment. “As a result, the pool of money flowing into emerging markets — considered risky — will come down. Fund managers will allocate more prudently in response to increased level of risks and underlying investors could also increase their redemptions,” said U R Bhat, director at Dalton Capital.

In the early part of 2019, FPIs were investing aggressively after slamming brakes a year ago. Foreign brokerages such as Goldman Sachs and BNP Paribas had upgraded their stance on India in the hope of stability in corporate profit growth and resolution of the bad loans crisis. However, earnings growth is yet to show signs recovery. Analysts say valuations remain stretched, with earnings growth still lagging expectations.