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Capital market concerns

The unstable Rupee and oil prices coupled with the RBI-Government impasse and disinvestment by FPIs draws a troubled economic paradigm for India

Capital market concerns

Officials in the finance ministry may disagree, foreign portfolio investors may not be seeing India an attractive destination, at least for now. Overseas investors pulled out a massive Rs 38,900 crore (over $5 billion) from the capital markets, last month. It was the steepest outflow in nearly two years. In November 2016, FPIs (Foreign Portfolio Investment) had pulled out Rs 39,396 crore from the capital markets. The total outflow from the capital markets (equity and debt together) has reached over Rs 1 trillion so far, this year. FPIs are becoming increasingly cautious about the Indian market. It is not clear if this has anything to do also with the government's bid to seize RBI's key powers in the face of uncertain trade and economic developments.

Rising current account deficit (CAD), falling foreign direct investment (FDI), frequent Rupee fluctuation, high oil prices, mid-term impact on India of US sanctions on Iran despite specific relaxations on oil import and Chabahar port-rail construction, massive accumulation of non-performing assets with government-controlled commercial banks and pre-election political commitments to small and medium enterprises and farm producers — important vote banks — are among the matters of economic concern.

The government's showdown with the executive management of the Central bank and invocation of Section 7 of the RBI Act to force the Central bank on a table to discuss a dozen issues, including easing liquidity and promoting credit off-take among SMEs, is hardly of any comfort to highly sensitive FPIs in the midst of other issues. The government is believed to have sought a facility to raise up to $30 billion and application of Basel III capital norms, stipulating less stringent provisioning rules.

Clearly, FPIs do not see it as an exciting time to invest in India's equity markets, under such conditions. The FPIs, which effectively control India's stock market, banked heavily on the country's growth under a more liberal atmosphere since they smelt a wind of change in its political administration towards the end of 2013. Their intuitions proved to be right until sudden demonetisation hit the economy mid-way. FPIs' secondary market investments, considered as 'hot money' by conservative economists, have helped RBI build large foreign exchange reserves. However, FPIs have been net sellers almost throughout this year barring some months such as January, March, July, and August.

The disinvestment by FPIs in the Indian capital market intensified towards the end of September when they had pulled out over Rs 21,000 crore and has continued unabated since then. FPIs invest all over the world, depending on their market perceptions or expectations. Yet, much of their investment decisions are also based on performance forecasts of the US markets, such as the NYSE and Nasdaq. They pull out funds from uncertain markets to those offering reliable short and mid-term returns. The improving performance of the US economy — despite President Donald Trump's restrictive policies on import and immigration— and hike in rates by the US Federal Reserve System in the recent past, and rising employment and income have made the US a better and safer destination for market investments.

According to reports, so far this year, FPIs have pulled out over Rs 42,500 crores from India's equity market and more than Rs 58,800 crore from the debt markets. FIIs have remained net sellers of Indian debt for the year, offloading $7.76 billion in domestic bonds. Interestingly, they are returning in the debt market as many banks are fund-starved. This month, they have bought over $700 million in debt, the highest monthly purchase since January. The ongoing global trade tiff, fluctuating crude prices and higher US Treasury yields have been certainly influencing FPIs' investment decisions. It is true that FPIs have been net sellers in India almost throughout this year. However, the swiftness with which they exited from India in October has shaken the market. External factors such as the International Monetary Fund's (IMF) latest downgrading the world economic outlook to 3.7 per cent growth and a tightening of global dollar liquidity may also have been behind FPIs' market-linked disinvestment decisions.

Many analysts see FPIs' latest spate of withdrawals from Indian markets as part of global phenomena across emerging markets and not limited to India alone. However, the impact of high oil prices is more for India as it imports over 80 per cent of its oil requirement. The matter was further exacerbated by the massive default by Infrastructure Leasing & Financial Services Limited (IL&FS), despite an impressive 'AAA' rating by CRISIL and the rout in NBFC debt papers. CRISIL is part of world's No.1 rating company, S&P Global. LIC is the largest shareholder in IL&FS with 25.34 per cent stake in the company, followed by Japan's Orix Corporate having 23.54 per cent stake in the beleaguered company. The State Bank of India has 6.42 per cent stake in IL&FS. FPIs were taken aback by wrong assessment by international credit rating agencies of the financial health of IL&FS. In the midst of these negatives, the government's continuous spat with the professionally-managed Reserve Bank on a host of issues carrying more political weight than conservative economic reasons appears to have shaken FPIs' overall confidence on the Indian debt and equity markets.

FPIs also seem to be less comfortable about the possible outcome of the forthcoming Lok Sabha election and the economic focus and stability of the next government. On the positive side, India is still the best performing nation in terms of overall growth rate among large economies. And, foreign investors are returning to at least India's debt market. FPIs have bought nearly $1.26 billion in debt over nine trading sessions (between 24 October and 5 November) and have been buyers in all sessions except one during this period. Falling global oil prices and selective import cuts should stabilise Rupee in due course and benefit stock and commodity markets, as well.

(The views expressed are strictly personal)

Nantoo Banerjee

Nantoo Banerjee

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