The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper
Search
+

    Federal Reserve signals for Indian investments

    Synopsis

    Global G-10 bond markets have seen a structural bull trend over the last three decades.

    Getty Images
    As mentioned earlier, India, given the size of the economy, provides the right opportunities in the right quantities.

    Related Companies

    NSE
    BSE

    PEER COMPANIES

    By Taponeel Mukherjee

    The signalling at the Federal Reserve of the US meeting last week that no more interest rate hikes should be expected during 2019 has ramifications across the globe given the scale of the US economy and the importance of Federal Reserve policy to global investments. From the perspective of the Indian investment community, there are some crucial takeaways and the reiteration of a few existing trends.

    First, given that global G-10 bond markets have seen a structural bull trend over the last three decades with interest rates moving lower, from a portfolio allocation perspective, the low long-term bond yields in the developed economies will create significant pressure on investment portfolios for investment return generation.

    Hence, the need to look for alternative mechanisms to boost returns will be even greater post the Federal Reserve meeting last week. This search for higher yield from developed market portfolios provides an avenue for emerging markets such as India to attract some of the capital that sits with developed market investors. Relatively dovish central bank policy like the one suggested by the Federal Reserve last week further adds impetus to the trend.

    The second and the biggest takeaway from the signals provided by the Federal Reserve is that the trends such as the availability of large amounts of capital for investment and the move from institutional investors towards more direct investments are here to stay. As developed economy based investors look towards emerging markets to generate investment returns, India by the sheer size of its market, is a destination for the return-seeking capital.

    It is true that while large institutional capital allocations from the pension and the insurance industry do consider the absolute level of interest rates, it is as much true that a lot of the significant portfolio allocation decisions are either long-term or structural given the large portfolio sizes.

    Therefore, lower long-end yields in the developed markets provide India with an opportunity to attract long-dated structural funding for mission-critical businesses and infrastructure. The structural nature of portfolio allocations implies that if attractive investment opportunities are found in India, then the capital being invested does not necessarily face the risk of "capital-flight" even if interest rates were to move significantly higher in the developed economies in the years to come. Essentially, greater focus towards attracting investment inflows into India which flow into the Indian economy due to structural low-interest rate regimes allows India the leeway to attract "higher-quality" capital that is focused on long-term returns.

    The single most significant focus for long-term capital in India must be on the unlisted market and unlisted assets. The greatest challenge for both investors and the government, for obvious reasons, has been directing capital into the unlisted space. In the past, lack of transparency, an opaque pricing mechanisms and regulatory hurdles have all been issues. However, with market instruments such as Infrastructure Investment Trust (InvIT) type of vehicles that help bridge the gap between unlisted assets and a liquidity provision platform, we are taking steps in the right direction.

    Structural changes sweeping across the asset management industry globally such as the recent decision by the California Public Employees' Retirement System (CalPERS) to approve two internal private equity organisations is vital for India. CalPERS decision has two significant ramifications.
    Firstly, fee structures across the alternative asset management industry are being questioned as investment returns have experienced downward pressure. The pressure to generate higher yields in the face of higher asset management fees also implies a search for greater-yield. A growing market such as India is an obvious investment destination for such funds. Secondly, an institution such as CalPERS with $354 billion under management will need large economies with a relatively high threshold of minimum deal size to operate in.

    As mentioned earlier, India, given the size of the economy, provides the right opportunities in the right quantities.

    In summary, structural changes sweeping through the world in terms of demographic trends, under-funded pensions funds and lower-interest-rate regimes are an opportunity for economies such as India to partner with capital providers to help boost growth.

    Signalling by central banks, such as the Federal Reserve, are a timely reminder that the opportunities still exist, and a renewed focus is the need of the hour.

    (The views expressed are personal. Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. He is reachable at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)


    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

    Also Read

    8 Comments on this Story

    Rajeev Kaushik509 days ago
    As per US investors concerns when federal rate cut are announced investors prefer equity investments more than debt and money starts pouring in emerging markets. The authors point of view is also correct that developed countries bond market yields are at highest point where saturation leading to narrow scope of further hike and the bank rates has little scope for further cut. In India the loans are defaulting because business inputs has increased due to high interest rates maintained and high energy costs, transportation, GST , high labour costs and the profits could not improve much despite sales increase and low rate of inflation. The difference in RBI repo rate and inflation is so large that it is creating much imbalances in assets and liabilities. The recent rate cut has helped a bit but lot more balancing in input costs and profitability required to be worked out. Further RBI rate cuts and FII finding emerging markets as high yielding assets can improve foreign money flow to INDIA A LOT MORE if further policy decisions are not taken in the reverse direction in the name of protecting INDIAN ECONOMY from external dependency.
    Diepak Paul509 days ago
    Attracting capital is a magician''s work. There is no shortage of money with in India, or globally. Only the faith is still short.
    Sk Kapoor509 days ago
    India needs a profitable banking system. Loans are usually in default.
    The Economic Times