Resilient show

For all the recent consternation over the volatility in India’s stock, bond and currency markets, they have proved quite resilient to the massive foreign portfolio investor (FPI) exodus so far this year. FPI pull-outs from India in the first nine months of 2018, at $13.1 billion, have been highest in any year since the FPI floodgates were opened in the 1990s. But despite the $4.4 billion of their selling in stocks, bellwether indices such as the Nifty50 remain in the green on a year-to-date basis. Bond markets have borne the brunt of FPI withdrawals at $8.7 billion, but the benchmark 10-year gilt has strengthened by just 60 basis points so far this year. Even the rupee’s 13 per cent depreciation against the dollar has been far more orderly than the free falls witnessed in 2008 and 2013.

There are good reasons why domestic markets have withstood the onslaught of FPI selling better than before. In equities, rising domestic investor participation in mutual funds has allowed them to absorb the selling pressure, especially in blue-chip stocks. In bonds, thanks to RBI-imposed limits, FPI ownership of gilts is limited to less than 5 per cent of the market. Continued strength in foreign direct investment (FDI) flows into India, at $22 billion in the first six months of 2018, have proved a blessing for currency markets, partly offsetting the pressure from fleeing portfolio flows. But the resilient show so far cannot be cause for complacency for either the RBI or the Centre, as it may not take much for any of these indicators to spiral out of control. There are already signs of ebbing investor enthusiasm for equity funds. With inflows into balanced schemes taking a hit in a falling market, equity fund inflows have dipped by a third in April-September 2018. India’s bond markets typically attract considerable carry trades, which are threatened by the continued strength in the dollar and the spike in US treasury yields. If rate differentials with the US continue to shrink, the Indian economy may also be singled out for exiting by FPIs owing to its precarious current account, its vulnerability to spiralling oil prices and its looming political risks.

However, FPIs are hard-wired to rejig their allocations based on global cues. Therefore, it is doubtful if domestic policy interventions will really work to stem FPI outflows at this juncture. Measures such as the Voluntary Retention Route, mooted by the RBI to carve out additional bond limits for FPIs who commit to longer terms, are unlikely to work at a time of such high uncertainty about India’s prospects. Instead, the Centre should double down to ensure that healthy inbound flows from long-term oriented FDI investors are sustained. Apart from continuing to liberalise procedural hurdles that stand in the way of investment approvals, the CBDT and sector regulators must be sensitised against arbitrary interventions in the local operations of multinational firms who have put their faith in India.

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