By Vaibhav Kapoor
For the major part of the last decade, since the financial crisis, global investors struggled to find reasons to remain cheerful. Until recently, interest rates in most developed economies were at record lows. This put large investors like pension funds, which derive their financial returns largely from the fixed income market, under increased stress. Uncertainty on the back of European financial crisis, Brexit vote, political crisis in the Middle East and rising terrorism, among other political-economic factors, clouded global financial markets for a long time. Not surprisingly, as was understood from many reports and articles, the increasingly risk-averse investors chose to sit on the sidelines with growing uninvested piles of cash. Despite global headwinds, India boasted of a relatively high economic growth rate during this period. According to World Bank data, India’s GDP (at current dollars) almost doubled from $1.2 trillion in 2008 to $2.3 trillion in 2016.
Also, over the years, India has seen a more disciplined fiscal policy, controlled inflation rates and implementation of transformative reforms including GST, a new insolvency & bankruptcy law, and most recently Rs 2.11 lakh crore bank recapitalisation. Detailed discussion on the efficacy of these reforms require a separate piece; but we all can broadly agree that these reforms are taking India into the right direction. “A bright spot” in global economy, India has enjoyed significant attention from the global investor community. We look at data from the last few years to see what the foreign investors have been up to. Two main routes taken by foreign investors for India are: (1) FII/FPI and (2) FDI. Focusing on FIIs/FPIs, fortnightly data from the National Securities Depository Ltd (NSDL) shows that Assets under Custody (AUC) for FIIs/FPIs increased at around 16% per annum over the last five years and by 25% in the last year.
As of October 15, 2012, the AUC for FIIs/FPIs was $230.7 billion, while as of October 15, 2017, the AUC was $480.0 billion. Recent steps by RBI, including the rationalisation of ceiling for investments into Indian corporate debt by FPIs, should help this trend further. For example, in September, as per an RBI notification, an additional Rs 44,001 crore headroom was created for FPI investment in corporate debt securities by carving out rupee-denominated overseas bonds (popular as Masala Bonds) as external commercial borrowings (ECB). Further, Masala Bonds are also gaining traction from foreign investors. The Rs 3,000 crore Masala Bond issued by HDFC was 4.3 times oversubscribed, according to the London Stock Exchange website. Similar rationalisation of investment ceilings has been done for investment into government securities as well. Lastly, PricewaterhouseCoopers conducted the FPI survey 2016-17 which highlighted that 67% of FPIs stated India is their preferred destination among emerging markets. Looking at the FDI route, data from the Department of Industrial Policy & Promotion (DIPP) shows that between 2012-13 and 2016-17, FDI equity inflows registered an annual growth rate of 18%. More recently, for the period April to June 2017, the total FDI equity inflows, according to DIPP, were $10.4 billion, a 37% growth compared to the same period in 2016.
Another venue where we can identify activity by foreign investors is the Foreign Venture Capital Investor (FVCI) route. Quarterly data sourced from SEBI on cumulative net investments since March 2007 shows an upward trend for this route as well. So, why is all this data important? We should appreciate that large investors, depending on their mandate, have the flexibility of investing across multiple asset classes and geographies. Also, investment choices, especially for institutional investors, are made after significant due diligence and research. It is evident that investors across the globe have been increasing their exposure to India over time, showing their confidence in the Indian economy. It should also be noted that most of these investors, especially FDI and FVCI, invest in long-term prospects of the economy.
Thus, it could be argued that the investment trends discussed above can serve as one of the leading indicators for the perceived growth of our economy. We must also recognise that sustained momentum in foreign investment inflow is needed over the next few years if we aim to grow at rates that are in high single digits. Policy consistency, increased transparency and a strong legal/regulatory system are probably the main concerns for an investor investing in a foreign market. These are especially important as rising interest rates and stabilising economies attract investments to the developed world. The government will play a big role in ensuring that global capital finds a happy home in India. Recent news highlighting a significantly improved ranking in the World Bank’s Doing Business Report 2018 and satisfactory corporate earnings in Q2-2018 are encouraging and will help support the momentum gained over the last few years.
Public policy specialist, NITI Aayog. Views are personal