FPI inflow may hit $2 billion a week if BJP wins elections 2024: Nomura

On the other hand, if BJP fails to win the elections, Nomura expects outflows from the forex channel to be over $30 billion in a couple of weeks.

A victory for Narendra Modi-led Bharatiya Janata Party in the elections 2024 is likely to see foreign portfolio investors (FPIs) return to Indian shores, said analysts at Nomura, who pegged their weekly inflow to the tune of $1 – 2 billion into the debt markets till the JP Morgan index inclusion date (June 28).

On the other hand, if the BJP fails to win election 2024, which is not their base case, Nomura expects outflows from the forex channel to be over $30 billion in a couple of weeks, which would require heavy intervention from the Reserve Bank of India (RBI).

“The RBI recently resumed its accumulation of forex (FX) reserves after selling during April; however, the flows are still light for now. These flows have followed capital account flows closely, with FPI accounts in both equities and bonds driving the flow. We view this channel as a pure reflection of the election outcomes. Given our base case is for a BJP win, we expect to see capital flows return, and estimate around $1 billion - $2 billion of inflows weekly after the election into the index inclusion date," wrote Nathan Sribalasundaram of Nomura in a recent note.

Over the coming weeks, Nomura sees the RBI’s FX intervention strategy as the main driver of interbank liquidity, which, it said, should largely be driven by the election outcome. FPI accounts, Nomura said, have resumed buying IGBs over the past few weeks, though in small sizes for now.

“However, beyond the FX channel, we should start to see inflows from GOI redemptions, interest payments and lower T-bill issuance. Under our base case, we can see interbank liquidity entering into a surplus by July. In the scenario where the election tail risk emerges (BJP fail to form a government), we believe outflows from the FX channel would be very significant (over $30 billion in a couple of weeks), which would require heavy involvement from the RBI,” Sribalasundaram of Nomura said.

Index inclusion

Foreign investors, meanwhile, have pumped in over Rs 7,400 crore into the Indian debt securities in May on a net basis, as compared to a net sell-off of over Rs 11,200 crore in April 2024, shows data. The inflow is mostly on account of an inclusion of Indian government bonds in the JP Morgan Government Bond Index-Emerging markets likely in June 2024.

 

 

With this weightage, experts believe that India is expected to garner total inflows close to $30 billion in fiscal year 2024-25 (FY25). There will be an investment in over 23 Indian government bonds with the notional value to the tune of $330 billion, analysts said.

In addition to the JP Morgan index, Indian securities are also expected to be included in the Bloomberg EM local currency government Index, which could possibly include 34 Indian securities. This is likely to happen by January 2025 with an initial weightage of 10 per cent.

"With this, India’s rupee will become the third largest currency, component wise after China’s renminbi and South Korean won. Overall, we expect this will bring in combined (equity and debt) FII flow to the tune of $40-45 billion," said Jahnavi Prabhakar, an economist with Bank of Baroda.