Foreign flows into India might hit a bump

Inflow from foreign portfolio investors into India is likely to get impacted in the near term

India is unlikely to be insulated if there’s a major flight of capital from emerging markets (EMs) after last week’s spike in US bond yields. 

The markets in India, Indonesia, Philippines, and Brazil fell between 2.7% and eight per cent on Friday, as the 10-year US bond yields rose about 40 basis points to  2.15% last week. Investors are worried that interest rates in the US will rise under the Donald Trump regime, triggering capital outflows from riskier assets such as EMs.

Inflow from foreign portfolio investors (FPIs) into India is likely to get impacted in the near term. “Despite being a bright spot, India is not fully insulated from an EM basket sell-off,” said U R Bhat, managing director, Dalton Capital (Advisors) India.

If the weakness in EM currencies against the dollar persists, incremental foreign flows could be hit, say analysts.

According to Ajay Bodke, chief portfolio manager at Prabhudas Lilladher, money is moving back to the US. “FPIs are not distinguishing between domestic-focused economies such as India and export-focused EMs. It’s a sell-off across the EM basket,” he said.

In the year-to-date, FPIs have pumped in $38 billion in EMs (see table). In terms of return, India is up 2.7% in the year-to-date, behind Taiwan (7.4%), Indonesia (14%), Thailand (16%) and Brazil (41.2%). Thailand and Brazil have surged despite relatively modest FPI inflows. 

Indian equities, a lot more dependent on FPI flow, could be under considerable pressure if flows dry up, caution experts. “While domestic institutions have been net sellers, they might not have the willingness or muscle to fully offset any major selling by overseas investors,” said Bhat. 

In the year-to-date, domestic institutional investors have put $2.25 billion in Indian shares. The total value of FPI investment was close to $410 billion for the period ended September, about 27 per cent of investment in Indian equities. 

Experts are hopeful that outflows from India might abate in time. “Capital gravitates to markets where there is growth and investors are likely to reassess their allocation when sanity returns. India will attract flows as it is among the fastest growing markets, its government has shown commitment to financial consolidation, the current account deficit is low and inflation is trending downwards,” said Bodke.