FPI outflow to continue even after surcharge rollback, supportive global monetary policy; here’s why

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Published: September 4, 2019 5:33 PM

Even after the rollback of the enhanced surcharge and accommodative global monetary policy stance, FPI flows into India are expected to see headwinds over the near-to-medium term, a report said.

The FPIs are on a selling spree after July 5 when Finance Minister announced imposition of an additional surcharge on FPIs in the budget. 

Even after the rollback of the enhanced surcharge and accommodative global monetary policy stance, FPI flows into India are expected to see headwinds over the near-to-medium term, a report said. The weakness in demand for debt instruments in the emerging markets is on account of muted demand in major economies, geopolitical and trade tensions and a gradual weakening of the economic growth prospects in India, India Ratings and Research said in a  report. The FPIs are on a selling spree after July 5 when Finance Minister announced imposition of an additional surcharge on FPIs in the budget.

According to the latest depositories data, the FPIs withdrew a net amount of Rs 17,592.28 crore from equities and infused in a net sum of Rs 11,672.26 crore in the debt segment, translating into a total net outflow of Rs 5,920.02 crore during August 1 to 30. In July, foreign investors had withdrawn a net amount of Rs 2,985.88 crore from the markets.

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“..given the continued slowdown in economic activity, the agency expects combined market borrowings of nearly INR6.35 trillion by the central and state governments between September 2019 and March 2020,” the report added. So, the demand for government bonds continues to remain weak through the second half of the ongoing fiscal. Even the benchmark G-Sec yield curve could come under pressure, it added. This would result in a further rise in financing costs for private sector borrowers, the report noted.

“Although the current account surplus is still above 0.2%, the shrinkage has been accompanied by a large quantum of debt flows into China, driven by continued Chinese policy action towards stimulating domestic consumption,” the report said. The agency also believes that China would keep crowding out capital flows to emerging markets such as India and ultimately, FPI inflows would remain under pressure.

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