The Economic Survey said that the net outflow of foreign portfolio investments (FPI) from Indian markets in November and December was part of global phenomenon as FPIs pulled substantial investments out of most emerging market economies (EMEs) owing to the availability of higher returns in advanced economies. The survey also projected that FPI growth may continue to be slow in FY18, partly on account of increasing interest rates in the US.
“The decline in interest rates (in India) and the outlook triggered a large outflow of FPI, amounting to $9.8 billion in November and December, with 60% of the decline accounted for by debt outflows,” the survey observed. It further said that for the first time since the meltdown of 2008, net FPIs turned negative (there was an outflow from the Indian markets to the tune of Rs 23,079 crore in 2016).”
Some analysts had blamed demonetisation for the outflow, which prompted resulting in Securities and Exchange Board of India (Sebi) chairman U K Sinha to say that the impact of the note ban on the outflows was being analysed.
However, before the outflow of FPI in later part of last year, positive inflow of FPI during April-September helped the country finance its current account deficit, leading to an accretion in foreign exchange reserves in H1 of 2016-17, it said. Looking ahead at the growth prospects for FY 18, the survey warned that lower growth in FPI could not be ruled out, partly on account of the fact that the interest rates in the US have begun to increase.
Earlier this month, the government tried to assuage the concerns of the FPIs by putting in abeyance its December 21 circular that amplified their concerns over a potential rise in tax liability under India’s controversial indirect transfer provisions. Tax experts said the decision to not implement the circular, coming as it did ahead of Budget FY18, signalled the government’s intent to spare small overseas investors in FPIs registered in India from paying taxes in India on redemption of shares/units.