Opinion

Will FIIs return to Indian Markets after the recent lull?

Arun Malhotra | Updated on June 17, 2021

India will remain one of FIIs’ favourite investment destinations. Economic activity hit by second wave of Covid is bound to recover as the crisis recedes

Foreign investors (FDI/FIIs) continue to be one of the most significant drivers of the Indian equity market. There is no doubt that FIIs, especially the long-only funds, have found India to be one of the most attractive markets since early 2000 as the Indian market has shown consistent growth over the years.

The recent second wave of Covid-19 has affected inflows to an extent, which is mainly because of the decreasing investor confidence in economic growth and the fear of spread of the virus to villages that could harm rural growth in the short term. The abrupt halt of economic activity due to the second wave has led to the lull in FII activity. This is bound to recover as the crisis recedes, and the people of India get vaccinated.

Vaccination, a shot of confidence

This time around, the Indian government has drawn very comprehensive plans for vaccination and the pace this time will be much faster and the reach much larger so as to cover the entire nation. The vaccine pipeline is strong enough that it aims to reach 5.0 million doses per day and eventually this will lead to vaccinating more than 60 per cent of the Indian population by December, 2021. However, this time, there were no shutdowns of manufacturing activity, and even other allied economic activities were functional. This restores confidence that the economic growth will not get hit much and the bounce-back will be sooner than later, and I am confident that FIIs’ buying activity will also catch up.

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Positive impact of reforms

The pent-up demand in Q2FY22 will help recover some of the lost revenues. FY22 GDP growth will see a smart recovery of close to +10 per cent, albeit from a low base of Covid-affected 2021. The corporate profit cycle is also on the upswing, currently at 2.2 per cent and should rise to close to 4 per cent of GDP by 2025. The recent run-up in stock prices (and valuations) has also contributed to the slowdown in the FII flows in the short term. The “long-term growth” story of India remains very robust — the structural reforms and significant policy measures undertaken in the last 5-7 years have sowed seeds for uninterrupted growth for the Indian economy, post the pandemic. Reforms like GST, demonetisation, NCLT, focus on manufacturing and exports, and Digital India — all these measures will significantly enhance productivity levels across India and increase the competitiveness of domestic firms in global markets.

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Growth drivers

FIIs find India to be an attractive destination. The huge consumer market, the liquidity, the growth potential coupled with the stable currency, and burgeoning forex reserves that have reached upwards of $600.0 billion, provide an unparalleled opportunity for investments for global investors. The current decline in economic growth in the short term is just cyclical in nature, more driven by the pandemic, while the pace of reforms in the recent past has laid a very solid foundation for strong structural economic changes. Furthermore, the technological innovations in manufacturing, aided by the new Industrial policy that plans to promote AI, robotics and the latest technologies, will result in sustained future growth.

I firmly believe that money will flow from developed markets to emerging markets in the medium to long term. Global growth is slowing down, and the China factor and the heavily leveraged balance sheets of the US and some EU countries pose further additional risks for global growth. The FIIs will return, the stability in currency, and outlook for future growth provides them an attractive investment target. It is just a matter of time before we see them in buying mode on the Indian bourses.

I am very optimistic on the underlying changes in the Indian economy and believe that India will remain one of the fastest growing economies, going forward. The huge domestic market and investor-friendly policies, coupled with improving infrastructure and ‘ease of doing business’ policies, will also attract newer investors. To reiterate, India has been, and will remain, one of FIIs’ favourite investment destinations. The FIIs will continue to be significant contributors to Indian economy through their investments in both primary and secondary markets.

The author is founder of CapGrow Capital Advisors, a SEBI-registered PMS firm

Published on June 16, 2021

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