Long-term trend shows stable FPI flows into India, with peak in FY15

Outflows in just seven years since FY98, the first one seen post the Asian Financial crisis

India has witnessed stable portfolio flows, with outflows in just seven years since FY98. The first bout of outflows, albeit a short-lived one, was seen post the Asian Financial crisis.

FPI flows have been positive in 10 of the last 15 years, with five years seeing inflows of over $20 billion. The highest FPI flows were seen in FY15 at $45.7 billion, with debt investments peaking at $27.3 billion.

“This was the time when the government also had more liberal terms for FPI investment in both government and corporate debt. This was probably the golden year because after FY15 there have been erratic movements in both equity and debt. In the last 4 years, debt inflows have been negative or virtually close to nil which is a concern as even though there are more liberal limits for FPIs to invest, they are not being utilized. The focus must be on 2 the development of the corporate bond market to make them more liquid. Also the high government borrowing programme has militated at the margin at the attractiveness of these bonds,” said a report by Bank of Baroda.

In terms of sources of FPI, the US had the largest share (37%) in March 2022, followed by Mauritius (11%), Singapore (8 per cent), Luxembourg (8 per cent) and the UK (3 per cent). A strong US economy with a conservative monetary stance that involves high interest rates would tend to deter funds from moving out as higher returns are earned by investors in the domestic market, said the report.

FPI flows are dependent on both domestic and external factors. Domestic factors will include tracking political stability of the country along with other macro-economic variables. This has been referred to as ‘top down’ approach. Moreover, rating action, stock market returns along with exchange rate movement also are important determinants, according to the report.

“A regression analysis of returns of Sensex on FPI equity flows shows R-square of 0.27 with the coefficient for FPI being significant. Hence while it is not the sole factor driving the market, it is important nonetheless,” said the report.

“The rate hike cycle is back on the table globally which poses a significant risk for future FPI inflows to emerging markets including India. This is also being accompanied by a move to roll back on the QE measures with the Fed talking of shrinking its balance sheet. This means that there will be a new series of reallocation of resources by these fund managers,” the report added.