India remains favourite with FPIs despite a steady deterioration in macros

India has traditionally been one of the favourite destinations for foreign portfolio investors (FPIs). In the past 12 months, Indian equity market received nearly $18 billion worth of FPI inflows, highest among the emerging markets. 

FPI’s love for India shows in the premium valuation on Dalal Street. At 25.2 times trailing earnings BSE Sensex is the most expensive benchmark index in the emerging markets. It is nearly 50 per cent expensive, compared to benchmark equity indices in Indonesia, Brazil, China, and Mexico and over three times expensive compared to its Russian peer.

Strong capital inflows, however, contrast with a steady deterioration in the country's macro-economic fundamentals. According to the International Monetary Fund, India saw one of the sharpest declines in headline economic growth in 2019 and lost the tag to the world's fastest growing economy to China among key countries and Bangladesh over all.)

IMF expects a gradual recovery in growth in 2020 but China, Vietnam, and Bangladesh are likely to grow faster. Slowdown is also visible in India's merchandise exports and consumer demand domestically. The net result has been a slump in overall demand in the economy, hitting the job market and corporate earnings.

According to Bloomberg, the underlying earning per share (EPS) of BSE Sensex (in dollar terms) is expected to grow by 11.8 per cent in calendar year 2020, underperforming other indices with the exception of Russian market. 

India's macros have also been muddled by a rising fiscal deficit and public borrowing to fund it. At around 7.5 per cent of GDP, general government borrowing in India is on the higher side among EM peers.