Foreign brokerage CLSA sees foreign flows into India doubling to 1% of the GDP, from the 0.4% during 2014-22.

In a note, CLSA analyst Indranil Sengupta says the rupee’s annual depreciation could be limited to 2.5% (compared to the annual 5% from 2010-20), thanks to Reserve Bank of India (RBI) governor Shaktikanta Das shoring up forex reserves to an adequate level of $600 billion (Rs 50 trillion).

“Not only has INR depreciated just 0.4% in the last 12 months, it has also held up against peers. This has pushed up FPI inflows to India. Notably, India’s share in the MSCI EM Index is rising. Listing of Indian G-secs in the JPM EMBI Diversified should increase FPI debt investments by $21 billion (Rs 1.7 trillion) by March 2025,” says Sengupta.

Equity FPI flows averaged 1.2% of GDP in 2004-08, as a high 14-month import cover strengthened the rupee. As forex reserves came off to 7 months in FY12-14, an 11% depreciation in the rupee pulled down equity FPI flows to 0.2% of GDP between FY15-23, the note pointed out.

So what makes forex reserves important? Sengupta says investors seek the assurance that they can exit without taking a big hit on the currency side. With the rupee stabilising, India’s weight in MSCI is on the rise (18% in February 2024, from 7% in December 2014).

India has benefitted from rebalancing from China, as well as bond inclusion, and FPI flows are reverting to the pre-Great Financial Crisis levels, it says.

CLSA continues to estimate adequate forex reserves at $600 billion levels, based on three key metrics.

First, a 10-month import cover, which works out to $610 billion considering the rupee weakens below 8 months. Second, a 75% FPI cover, which works out to $570 billion. Third, a 2x short-term external debt cover, which works out to about $600 billion (including FPI debt investments).

Further, India’s listing in the JPM GBI EM Index should fetch $20-25 billion from debt FPIs benchmarked to it, by March 2025. The inclusion will add more players to the G-sec market. Debt FPIs will only take out the forex they bring in, which allays concerns over potential sell-offs. In addition, this is somewhat sticky money as these debt FPIs would be benchmarked.