Uncertainties to restrict overseas fund flows into Indian equities, says BofA-ML

Foreign investments into Indian equity are likely to slow down due to uncertainty regarding global events, research from abroad seems to predict. A report on Tuesday by Bank of America-Merrill Lynch said these ‘uncertainties’ include questions surrounding Greece’s future in the Euro Zone despite another round of bailout, the possibility of the Federal Reserve raising lending rates after keeping it near zero for several years and a slowdown in the Chinese economy.

“We see a downside risk to our $15-billion foreign portfolio investment FY16 inflow forecast in view of continued global uncertainty. We believe fresh equity inflows will likely swing on our expected earnings recovery in September, although India’s higher growth prospects and China volatility should limit outflows,” the report said.

Foreign investors are already overweight on India in their emerging market portfolios, the report notes. Instead, now, they are more likely to put their money into domestic debt.

“FPI debt investors under-own India and are more than willing to buy G-Secs if the RBI raises limits,” it said. Foreign investors have poured in ₹40,512 crore into debt from this January, according to data available with depositories.

A recent report by the global research team at HSBC also expects Indian equity to perform poorly in the present environment. “In the near-term there are a range of impediments… most particularly relating to US monetary tightening — HSBC expects a 25 basis point rate hike in December. Until there is greater clarity about the trajectory for the US monetary policy, it is difficult to see emerging market equities performing strongly.”

Domestically, a JP Morgan report says Prime Minister Modi’s Government has to offer a stable tax regime to both corporates and investors. In April, 150 FPIs were surprised by a Bill for minimum alternate tax they owed to the government, despite earlier signals from New Delhi, particularly in the Union Budget, that a less unpredictable tax regime would be installed.

Another cause of concern, JP Morgan points out, is the new methodology the government adopted to calculate the GDP growth figures, which the report says, show the Indian economy out-growing China, despite signs of sluggishness here.

What will get Indian equity out of the rut is a return in growth of corporate earnings. Barring a few, June quarter corporate results were disappointing. A strong monsoon, contrary to the Indian Meteorological Department’s forecasts, and key legislative reforms (particularly on goods and services taxes and land acquisition) are required, the HSBC report concluded.

COMMENT NOW