How will the Indian market fare after the US Fed meet?

A delay in US Fed action to December, analysts say, could stall flows into India

Concern about a slowdown in global growth, especially in China, a possible rise in interest rates by the US Federal Reserve (US Fed) and the slow pace of reforms in India saw foreign institutional investors (FIIs) pull out about $2.5 billion, or Rs 16,700 crore, from the Indian markets in August, sending the BSE Sensex down 6.5 per cent.

This month, too, there has been no respite from the selling pressure. Between September 1 and September 10, foreign investors sold about $836.5 million worth of Indian equities, show data available with Bloomberg. This month, investors have also pulled out money from other Asian and emerging markets such as Indonesia, Japan, Philippines, South Korea, Thailand, Brazil and Taiwan, data show. So, where has that money been deployed and will India be able to attract foreign flows again?

While it is difficult to ascertain where the money has been deployed, analysts say a part of it could have been invested in developed markets. Besides, investors could be holding a chunk in cash till there is more clarity on the US Fed’s move.

Nilesh Shah, managing director, Kotak Mahindra Asset Management, says, “Globally, there is a shift from equity to debt. This is happening in developed and emerging market equities. Investors are taking an asset-allocation call in favour of fixed income rather than equities. In the context of India, we have seen selling by sovereign funds that need to invest in their domestic economy. There has been a fall in oil prices and most sovereign funds are from oil-producing nations. Second, we have seen ETF (exchange-traded fund) redemption, which has pulled out funds from emerging markets.

“Our hope and belief is as long as the Indian economy is on a good platform, we should be able to attract foreign money over a period of time. In the near term, selling by these sovereign funds and ETFs will be over and long-only money will start coming in. The one trigger that will bring back this money into India is the fact that they will be able to make more money in India compared to its peers. I see that happening,” he adds.

G Chokkalingam, founder and managing director, Equinomics Research & Advisory, says the money chasing debt instrument in the US isn’t that coming to India for investment in equities in a big way. He adds the FII money coming into Indian equities is for long-term wealth creation.

“Like post-QE III (third round of quantitative easing) withdrawal, this time too, the domestic equity market will start firming up once the US Fed actually starts raising rates,” he says.

Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, expects the US Fed to increase rates by 25 basis points later this week. “While there could be a knee-jerk sell-off across emerging markets, India would likely emerge as relative value, given the relatively higher growth. Portfolio flows could resume in equities due to risk diversification out of China’s volatile equity market and in bonds, with the S&P downgrading Brazil to junk if the Reserve Bank of India raises FPI (foreign portfolio investors) G-sec (government security) limits. The worst would be if the US Fed signals October/December action. That would stall capital flows till winter, given the uncertainty on a turnaround in earnings and the Bihar poll results on November 8,” he says.