Long-term trend shows stable FPI flows into India, with peak in FY15
India has witnessed stable portfolio flows, with outflows in just seven years since 1997-98. The first bout of outflows, albeit short-lived, was seen after the 1997 Asian financial crisis.
Foreign portfolio investment (FPI) flows have been positive in 10 of the last 15 years, with five years seeing inflows of over $20 billion.
The highest FPI flows were seen in 2014-15 (FY15) at $45.7 billion, with debt investments peaking at $27.3 billion.
“This was the time when the government also had greater liberal terms for FPI investment in both government and corporate debt. This was probably the golden year because after FY15 there have been erratic movements in both equity and debt. In the past four years, debt inflows have been negative or virtually close to nil. Even though there are more liberal limits for FPIS to invest, they are not being utilised. The focus must be on the development of the corporate bond market to make it more liquid. Also, a high government borrowing programme has militated at the margin for the attractiveness of these bonds,” said a report by Bank of Baroda.
In terms of sources of FPI, the US had the largest share (37 per cent) in March, followed by Mauritius (11 per cent), Singapore (8 per cent), Luxembourg (8 per cent), and the UK (3 per cent).
A strong US economy with a conservative monetary stance that involves high interest rates will tend to deter funds from moving out as higher returns are earned by investors in the domestic market, said the report.
FPI flows are dependent on both home-grown and external factors. Domestic factors will include tracking political stability of the country, along with other macroeconomic variables. This has been referred to as a ‘top-down’ approach. Moreover, rating action, stock market returns, along with an exchange-rate movement, also are important determinants, according to the report.
“A regression analysis of returns of the Sensex on FPI equity flows shows R-square of 0.27 with the coefficient for FPI being significant. Hence, while it is not the sole factor driving the market, it is important nonetheless,” said the report.
“The rate-hike cycle is back on the table globally, which poses a significant risk for future FPI inflows into emerging markets, including India. This is also being accompanied by a move to roll back on the quantitative easing measures, with the US Federal Reserve talking of shrinking its balance sheet. This means there will be a new series of reallocation of resources by these fund managers,” added the report.