The Indian capital markets were a hotbed for the foreign portfolio investor (FPI) inflows in 2017. India attracted a net inflow of over more than Rs 2 lakh crore in 2017. As the year ends, the Indian stock markets have taken their net investment position in equities alone to Rs 55,000 crore – the highest in three years after Rs 20,500 crore in 2016 and Rs 17,800 crore in 2015. The figures appear to be impressive, but not much considering the levels witnessed earlier – Rs 97,000 crore in 2014, Rs 1.13 lakh crore in 2013 and Rs 1.28 lakh crore in 2012. In the debt markets, the net investments have soared to a staggering Rs 1.5 lakh crore after a net outflow of about Rs 43,600 crore in 2016. Banking, housing finance and auto sectors have seen consistent FPI inflows.
What to expect in 2018?
the market experts predict 2018 won’t observe the same quantum of FPI inflows as this year due to a variety of reasons. The global liquidity is about to dry up as the US has already begun to tighten its monetary policy which will impact portfolio inflows in emerging economies including India. The US Federal Reserve is all set to raise interest rates as the inflation catches up, the size of its bloated balance sheet will reduce. Although India stands guarded against this to a certain extent since the domestic liquidity is at satisfactory levels at present, a sudden upshot by the Fed will adversely hamper its prospects. A recent blog post titled “Fed Tightening May Squeeze Portfolio Flows to Emerging Markets” by International Monetary Fund economist Robin Koepke said, “The IMF’s new model estimates show that normalization—raising the policy interest rate and shrinking the balance sheet—will likely reduce portfolio inflows by about $70 billion over the next two years, which compares with average annual inflows of $240 billion since 2010. Shrinkage in the Fed’s $4.5 trillion balance sheet, which began in October, accounts for most of the impact on portfolio flows—defined as foreign purchases of emerging market stocks and bonds. Reduced availability of foreign capital could make it more challenging for emerging market economies to finance their deficits and roll over maturing debt. That is why the Fed should move gradually and communicate its plans clearly.”
Recovery in commodity prices pose threat
Experts also believe that the kind of FPI flows as this year may not continue in 2018 as the inflation cycle is likely to turn following increase in commodity prices and recovery in consumer demand. The rising crude prices and widening fiscal deficit have again prompted FPIs to start selling in December. However, observing how debt market behaved in 2017, nothing can be predicted as yet. FPIs started 2017 on a negative note for debt market but infused money in February and their bullish stance has largely continued since then.
With PTI inputs