Will foreign investors make a comeback in 2019?

As the Indian economy stands on the cusp of major domestic and international cues, the big question is whether the FPI money will return to India in 2019?

Jan 14, 2019 08:01 IST India Infoline News Service

If you scan through the FPI flow data on NSDL, you will find that foreign investors sold close to Rs83,000cr in calendar year 2018. Nearly 40% was in equities and the balance 60% was represented by bond selling.
 
As the Indian economy stands on the cusp of major domestic and international cues, the big question is whether the FPI money will return to India in 2019?
 
What will impact FII flows into India in 2019?

Broadly, a mix of domestic and international cues will impact FPI flows in 2019. Here are six major factors that will have a bearing on FPI flows in the year.
  • Outcome of the General Elections in 2019 will be a key factor. While we will look at the empirical data flows from FPIs during election years later on in the article, the major question will be whether the reforms focus will continue?
  • FPIs will be keen to ensure that macro risks are kept under check. The fiscal deficit, if spilled over a certain limit beyond the FRBM target of 3.3% of GDP, will affect FPI flows. The guidance for the next fiscal will also matter.
  • Inflation and currency movement will be two key macro variables that will impact FPI flows. Inflation has remained at the lower end of the RBI comfort zone of 2-6%. Hence, currency stability, or at best, calibrated weakening will be preferred.
  • Global rates and liquidity will be another prime factor. FPIs will prefer that the Fed goes slow on rate hikes. With the ECB ceasing fresh purchase of bonds, liquidity infusion will also be an issue. FPI flows have been strong when liquidity has been robust.
  • If Indian companies are able to hold 20% profit growth, as ratified by consensus estimates, valuations may be closer to 17-18 times forward earnings. This would entice FPIs to commit money.

The valuation of Indian markets vis-à-vis other Asian EMs will also matter. FPIs have typically allocated at a premium to India MSCI weightage. If the currency is stable and earnings and GDP growth are maintained, flows should sustain.
 
Election years and FPI flows

The NSDL FPI data for the last three general election years of 2004, 2009, and 2014 and the corresponding FPI flows between May and December are as under:
Month of Elections Who came to power FPI Flows into equity May-Dec Months of positive flows
May 2004 UPA led by Congress Rs24,271 cr 7 out of 8 months
May 2009 UPA led by Congress Rs83,411 cr 8 out of 8 months
May 2014 NDA led by the BJP Rs66,075 cr 7 out of 8 months
 
The above data is interesting for three reasons. In 2004, the UPA led a minority government supported by the Left parties from outside. In 2009, the Congress was more dominant than in 2004, but it was still a coalition government. Year 2014 saw an NDA government with BJP the first party to get an absolute majority since 1984. Despite all these contradictory factors, FPI flows have been extremely robust in election years. That could be the good news as far as FPI flows in 2019 are concerned.

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