Uncertainty over IndiaMauritius DTAA, rising West Asia tensions can turn FPIs cautious
Children cross a dried up lake near Kathiatoli in Nagaon district, Assam. The level in over 122 of the 150 major reservoirs in the country was below 50 per cent with half a dozen of them completely dry, the Central Water Commission (CWC) said in its weekly bulletin on live storage. This year, the water levels have plunged to below the 10year average due to deficient rainfall on El Nino impact
The rising IsraelIran tensions and the uncertainty surrounding the IndiaMauritius Double Tax Avoidance Agreement (DTAA) can unsettle equity markets, potentially triggering increased outflows of foreign portfolio investments next week, warn experts.
After being net sellers for ₹325 crore in the first week of this month, FPIs went on a buying spree last week and closed it with net purchases of ₹13,347 crore as of April 12, data with depositories showed.
Including the infusion so far in April, the overall net FPI inflows till date this calendar year stood at ₹24,240 crore.
FPIs had net purchased equities worth ₹35,098 crore in March
LOOMING VOLATILITY.
FPIs net invested ₹13,347 crore in equities till April 12 this month; increased equity outflows from FPIs likely in next few days, warn experts and ₹1,539 crore this year. In January, FPIs were net sellers in equities of ₹25,744 crore.
TRIMMING EXPOSURE
Friday saw big FPI selling in equities worth ₹8,027 crore on fears that those investing from Mauritius may now face greater scrutiny post the latest amendment to the IndiaMauritius DTAA.
“The coming few days will be tough for foreign portfolio investments, which might see more outflows,” warned VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
“Since DIIs are sitting on huge liquidity and retail investors and HNIs are highly optimistic about the Indian market, FPI selling will be largely absorbed by domestic money.” Vijayakumar said that latest changes to the IndiaMauritius DTAA will weigh on FPI flows in the near term, till clarity emerges on the details of the new treaty.
India and Mauritius have agreed to alter the DTAA so as to introduce a provision of principal purpose test (PPT) which requires that an FPI or any other investor based in Mauritius must have a commercial rationale or a justification to be based there.
MIDDLE EAST TENSION
“Another major concern is the surcharged situation in West Asai with heightened tensions between Iran and Israel. These will keep the markets on tenterhooks in the nearterm”, Vijayakumar said.
The hotterthanexpected inflation in the US dashed hopes of three rate hikes by the Fed in 2024. Now, the market is pricing in only two cuts, that too towards the end of the year. Consequently, the 10year bond yield has spiked to 4.52 per cent, triggering more FPI outflows from EMs like India, he added.
Manoj Purohit, Partner & Leader Financial Services, Tax & Regulatory Services, BDO India, said the tax treaty amendment does not clarify whether or not past investments will be grandfathered, albeit, the PPT provision has been introduced as a nonobstante clause of the treaty.