The Hindu Business Line : `Markets may see dip in FII flows in 2006-07'

Reasons for downtrend
Portfolio flows are expected to go down in all emerging markets
The combination of comfortable monetary situation in the country and low interest rates at the global level have begun to reverse

New Delhi , Aug. 16

Stock markets in the country could see less foreign institutional investor (FII) interest this year. The Prime Minister's Economic Advisory Council (EAC) has projected a marked decline in portfolio flows into the country for the current fiscal, though it is expecting a substantial jump in foreign direct investment (FDI) inflows for 2006-07.

In its report on the economic outlook for 2006-07, the EAC has estimated that net portfolio flows for 2006-07 would be around $5 billion, significantly lower than such flows of $12.5 billion in the previous fiscal.

Explaining the rationale behind the expected dip in portfolio flows, Mr Saumitra Chaudhuri, Member EAC, told Business Line that "Net inflows of portfolio funds have been a negative $1 billion in the first four months of this fiscal. We don't expect portfolio flows to be anywhere near the record levels of last year — not to India nor to other emerging markets. We expect some pick up in the coming months but our estimation is that such flows would be around $5 billion this year."

Stating that the fortuitous combination of comfortable monetary situation in the country and low interest rates at the global level (which facilitated capital flows) have begun to reverse, the report said that globally too, the era of cheap money has effectively ended with major central banks tightening monetary policy.

The EAC has, however, projected a significant increase in FDI inflows at $8.5 billion in 2006-07 from a level of $5.7 billion in 2005-06 (as per RBI BoP data). On current account deficit, the EAC has pegged it at $11.1 billion for 2006-07, which works out to 1.2 per cent of expected GDP — broadly the same level as of last year. In 2005-06, the current account deficit was $10.6 billion, which worked out to 1.3 per cent of GDP — about double the level of the previous year.

Other estimates

The EAC has estimated loan receipts to go up to $12 billion from a level of $4.7 billion last year. It has also observed that the net accretion to reserves in 2006-07 will be $16.4 billion, lower than the amount of $23.8 billion of last year.

The merchandise trade balance has been pegged at $63 billion and the net invisible receipts are estimated at $52 billion (higher than net invisibles of $40.9 billion in 2005-06).

Net invisibles are expected to increase by about 27 per cent mainly on account of continued growth in software exports, modest increase in remittances and the absence this year of the one-time hit due to accumulated interest payments on India Millennium Deposits (IMD) in 2005-06. While software receipts for 2006-07 are estimated at $29.3 billion ($22.3 billion in 2005-06), worker remittances are estimated at $27.5 billion ($24.1 billion in 2005-06).