FPI Outflows Continue Despite Surcharge Rollback

Despite the government withdrawing the controversial enhanced surcharge on foreign portfolio investments (FPI), the markets have seen heavy selling by FPIs even after the move. While the net FPI outflow from equity markets stood at Rs 17,592 crore in August, it had already crossed the Rs 2,500 crore mark by September 4, mainly on account of heavy selling on Wednesday.

According to market experts, headwinds to FPI flows into India were expected to continue over the near-to-medium term despite the accommodative global monetary policy stance and the central government’s efforts to alleviate uncertainty regarding the higher surcharge.

An analysis by Fitch Group’s India Ratings and Research unveiled that a gamut of factors, such as slower-than-expected demand growth in major economies, geopolitical and trade tensions and a gradual weakening of the economic growth prospects in India, had contributed to a build-up of risk aversion, which has impeded the demand for emerging market (EM) debt instruments.

According to Ind-Ra’s analysis, while India might occasionally experience pockets of inflows, global capital inflows were unlikely to pick up sustainably. 

“Moreover, domestic institutional risk appetite remains subdued. Consequently, corporate bond spreads are likely to remain under pressure. Notwithstanding a series of rate cuts by the Reserve Bank of India and the softening of government security yields to a five-year low, the corporate spread over the benchmark has only widened. As the banking system struggles to ensure transmission of the repo rate cuts amidst high deposit competition and low risk appetite, the demand for corporate debt instruments has remained lacklustre in FY20,” it said.

The agency added that China had continued to crowd-out capital flows to emerging markets and that the phenomenon was likely to continue over the medium term, with China crowding out capital flows to markets like India. “Due to this, FPI inflows would remain under pressure.”

According to Arindam Som, Analyst, India Ratings and Research, the shift in global monetary policy conditions to a relatively accommodative stance was unlikely to revive capital flows into emerging markets like India. 

“Despite the US Fed’s decision to restrict the contraction of its balance sheet and the European Central Bank’s (ECB) decision to conduct a fresh round of targeted long term refinancing operations, Ind-Ra expects the cumulative liquidity infusion by the four major central banks (US Fed, ECB, Bank of England and Bank of Japan) in 2019 to be significantly low at around $ 186 billion compared with the infusions of $ 353 billion and $ 1.45 trillion in 2018 and 2017, respectively,” the analyst said.