India may need not worry about FPIs fleeing; soon, it might not have room to absorb foreign funds

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Updated: May 22, 2020 5:04:45 PM

Foreign portfolio investors (FPI) fleeing could soon be a lesser worry for India as the current account deficit turns into a current account surplus.

FDI, FPI, foreign investment, invest in india, rating downgrade, shaktikanta dasFPIs withdrew a total of Rs 1.18 lakh crore in the month of March, as the coronavirus pandemic spread across the globe, sending the domestic equity markets into a tizzy.

Foreign portfolio investors (FPI) fleeing could soon be a lesser worry for India as the current account deficit turns into a current account surplus. FPIs, since Prime Minister Narendra Modi last spoke to the nation, have net withdrawn Rs 22,800 crore from the Indian markets. On the other hand, India’s CAD (current account deficit) in financial year 2021 is set to enter surplus zone (0.2% of GDP for Q3FY20) given the sharp decline in domestic consumption expenditure and oil prices, said ICICI Securities in a research report. “A Current Account Surplus implies that, foreign flows will not be absorbed in the domestic economy and only result in RBI’s forex reserves and holding of low-return US treasuries to rise,” it said.

FPIs withdrew a total of Rs 1.18 lakh crore in the month of March, as the coronavirus pandemic spread across the globe, sending the domestic equity markets into a tizzy. FPI outflows posed as one of the bigger concerns during the Global financial crisis and Taper Tantrum for India, as CAD was high which exacerbated the impact of sharp portfolio outflows on macro-economic stability. With the current account turning surplus, economic stability will not require portfolio inflows. “Liquidity measures by central banks are likely to continue till recessionary trends remain which is positive for EM flows. Alignment of earlier FPI limits with FDI sectoral limits to result in additional FPI flows for India,” the report said.

In the month of April, although FPI selling moderated largely in comparison to March, sectors such as financials (excluding banks) saw outflows worth Rs 2,000 crore, followed by auto sector where FPIs withdrew Rs 1,900 crore. FPIs were seen buying consumer staples, energy, banks, and Media. Interestingly Mutual Funds’ (MF) activity in April was entirely opposite to that of FPIs. MFs sold private banks and consumer staples while they bought autos worth Rs 1,300 crore.

India’s current account has been in the negative territory since financial year 2005, according to Barclays research. Even Barclays had, earlier this month, highlighted that India’s current account could soon turn surplus, while terming it as an ‘unwelcome development’. “This year, India appears likely to post a current account surplus – an unwelcome development because the surplus will be driven almost entirely by the lockdown of the economy to contain the COVID-19 outbreak, and helped by the plunge in oil prices,” it said.

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