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FII flows may surpass 2012's record $24 billion: Market analysts

US & Asia-Pacific-based strategists confident that India-specific inflows could rise despite indices being at record highs.

Aug 18, 2014, 07.03 AM IST
US & Asia-Pacific-based strategists confident that India-specific inflows could rise despite indices being at record highs
US & Asia-Pacific-based strategists confident that India-specific inflows could rise despite indices being at record highs
Foreign portfolio investments in India this year may well surpass the $24-billion recorded in 2012, market strategists based in the United States and Asia-Pacific say, even as the indices are hovering around record levels, holdings of foreign institutional investors are at an all-time high and there is a premium of 416 basis points to the MSCI Emerging Market Index. A basis point is a hundredth of a percentage point.

Foreign funds have pumped $12 billion into Indian stocks since the start of the year. In 2012, 65 per cent of the total FII inflows came in during the second half of the year while in 2010, as much as 84 per cent of the total $29 billion was invested in the second half of the year. “It looks fairly possible that FII inflows during 2014 could overtake what Indian equities received in 2012, but exceeding the historic levels of 2010 looks hard,” said Shane Oliver, head of investment and chief economist at Sydney-based AMP Capital.

Arnab Das, managing director for macro strategy at the Londonbased Trusted Sources, agreed that FII inflows could top the level seen in 2012, but added, “It all depends on the interplay between the global environment and the domestic performance — not just macroeconomic but also in policy and in structural reform in particular. This would account for both the current and longer term trend of inflows into emerging markets, emerging Asia, and India.”

Offering a more calibrated view, Helsinki-based Hertta Alava, director, emerging market funds at FIM said in reply to an email query sent by ET, “I see Indian flows in 2010 and 2012 more as a reflection of general EM flows. However, this year it has been more India-specific. It’s difficult to say if Indian flows can breach 2010 and 2012 levels, but I’m relatively confident that at year-end, the figure will be higher than today.”

Indian equity markets have been the biggest recipient of FII flows among emerging markets this year. As a result, India’s weightage among the regional funds such as BRIC’s fund, Asia-Pacific Fund and Emerging Market has reached a significantly higher level than its historical average. Recent geopolitical tensions, swirling speculation regarding interest rate normalisation by the US Federal Reserve and surging US dollar might have unnerved quite a lot of emerging market strategists, pushing them to revisit their decision on the quantum of fund allocation to different emerging market. Yet, Indian equity markets continue to be in a sweet-er spot than their peers in Russia, Brazil, Indonesia and Thailand.

Indian markets have succeeded in staving off the risk of diversion of fund flows on two counts. First, FIIs believe that the new government will bring massive transformational and structural changes in the policy and reform process in order to pep up the sluggish economy.

“We’ve seen a broad shift in sentiment that favours emerging markets, and that shift has intensified in the recent weeks as two major developed markets’ asset classes, European equity and US junk bonds, have seen considerable sums pulled out and reallocated. In addition to this broad shift which, on a regional level, is favouring emerging Asia, India is now seen as a potential reform story,” said EPFR’s director Cameron Brandt.

EPFR Global tracks both traditional and alternative funds globally and has $23.5 trillion in total assets. Experts believe that the absolute majority government in India will help attract more foreign investments and reduce bottlenecks in policymaking.

The second factor is the biggest risk for the government’s balance sheet, the trajectory of crude oil prices, as the country is one of the biggest oil importers and depends on imports for as much as 80 per cent of its total crude oil consumption. With the prices of Brent crude correcting to a 13-month low, investors are considerably relaxed.

“The global investors’ perception about Indian equities could also get a further boost from the changing perceptions on the oil prices, a key factor for India’s current account deficit and inflation rate,” said Brandt.
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