Improvement in economic and earnings growth to bring back FIIs: Himanshu Srivastava, Morningstar Advisers
- A rate cut will not be a major factor in terms of getting foreign flows.
- The scenario in equity and fixed income are completely different.
- The post tax return for FIIs as of now will be relatively low.
We saw a hefty selloff by FIIs in July. What is leading to this change in stance? At the start of the year, we were supported by quite decent liquidity.
Actually the underlying factors which were driving flows have changed considerably. In February, March, and April we were receiving flows largely driven by global factors. A lot of central banks globally have adopted a dovish stance on monetary policy which enhanced global liquidity and that liquidity found its way into the emerging markets and India too benefited from that. However, post that, the focus was largely on domestic factors like election, election results. FII flows continued till June, largely driven by the outcome of the election. But in July, the super rich tax on FPIs announced in the Budget combined with macro concerns on the domestic side, saw FII flows decline.
The monsoon has not been too good. A tepid earnings season, the slow pace of economic growth plus increased tension between the US and Iran along with the ongoing trade war between the US and China, all combined to not really augur well for the markets or emerging markets like India.
We have seen FIIs pulling out money to the extent of $1.12 billion in July, which is the highest, after October last year, when the outflow was to the tune of $3 billion. So a combination of factors - -global and domestic - - as well as well as tax have definitely dented the sentiments among FIIs towards India.
Why do you think foreign investors are investing in the Indian debt markets because the trends in both the markets seem to be rather contrasting in nature?
Debt market is completely different from what we are seeing globally. The yield is ultra low in a lot of markets -- zero or even negative in some of the developed markets. In case of India, although the yields have come down since the start of the year, they are still attractive when compared with the developed countries.
So from the Indian perspective, with a stable currency, the chances of economic growth, reforms taking place and more rate cuts from RBI are needed. India is one of the countries where foreign investors are still finding value in terms of Indian bond markets where they can still make money compared to other markets where the yields are really low.
The scenario in equity and fixed income are completely different. Here it is more technical in nature. While they are not getting enough opportunity to invest outside India, India is giving them some attractive opportunity and that is where we are seeing increased inflows coming into the Indian bond markets.
How are the India-focussed offshore funds and ETF space doing? Is it continuing or are you seeing signs of stress?
The last time when we discussed, both the categories -- India focussed offshore funds as well as India focussed offshore ETFs -- were showing signs of recovery. The net outflow from India-focussed offshore funds was coming down. In fact, India-focussed offshore ETFs were seeing net inflows. However, things have changed since June. Obviously domestic as well as global factors have taken a toll on this category.
In fact, in May, this category witnessed a net inflow of marginal net inflow of $2 million after 15 months of net outflow but I do not think that pace is being continued at this moment, given the global and domestic stress that we are seeing in the markets. So yes, even this category has come under stress. We are still watching the July numbers.
It is not really emphatic at this point in time but they are provisional figures and they are bound to change but I do not see this trend sort of improving in the near term for India focussed offshore funds and the ETF category as well.
What do you think is going to be the silver lining now? Is it going to be the change in the interest rates trend because we are expecting the RBI to cut rates? Could that lead to a reversal in the FII flow situation? We thought that once we had a stable government at the helm, we would see a lot of money being pumped in from foreign investors. But that has not really been the case?
The rate cut is already taken into account and so a rate cut will not be a major factor in terms of getting foreign flows. The other factor that could be if the government comes out with the resolution on super rich tax that they have imposed. I do not see that happening and so obviously what will drive flows into the Indian markets will be some improvement in the global situation plus on the domestic side, the country has to grow in terms of economic growth, earning seasons have to be better and monsoon has to be good, so that companies make more profit and returns can be generated.
The post tax return for FIIs as of now will be relatively low. That is a cause of concern and so there has to be an improvement on the domestic front in terms of economic growth, in terms of earning potential of the company to be more beneficial. That will bring in more foreign money into the markets. If that does not happen, we can see this trend going on for some more months.