Mumbai, Sept. 13: At first glance, the Prime Minister’s Economic Advisory Council’s forecast of portfolio inflows of a piffling $2.7 billion this year looks like a shocker.
But market mavens believe that even this number will be hard to attain because of two reasons. First, portfolio inflows between April and mid-September (see chart) are a negative $4.92 bilion. Second, the US Federal Reserve is widely expected to scale back its bond purchase programme from $85 billion a month to $75 billion at its two-day meeting next week, signalling the taper of its quantitative easing.
This is further complicated by the economic slowdown in India, its struggle to put a lid on the twin deficits and the compulsions of adopting populist measures in an election year.
During 2012-13, India saw the FIIs making net purchases of equity and debt worth almost $27 billion.
Market pundits say that if the $2.7-billion forecast has to be realised, the FIIs will have to pour in $8 billion between now and next March.
When seen in this context, the drastic fall forecast for this year may initially look as being too pessimistic which many feel is a tall order.
Foreign investors have made net purchases worth $7.7 billion in this calendar year. Though they have pumped in more than $12 billion into equities, they have been major sellers in the debt segment with outflows estimated at $4.8 billion since January.
The outflows in the debt market have been on account of fears emanating from tapering of bond purchases by the US Federal Reserve, which resulted in firming of yields in the US. The equity markets have also wobbled because of fears that the tapering could impact liquidity in the system. The $85-billion-per-month asset purchases by the Federal Reserve had benefited emerging markets such as India as the ensuing liquidity flowed into stocks and bonds.
“Looking at the present scenario, even the $2.7 billion looks like a tall order. There are various headwinds that domestic markets will have to face. These include the impact of tapering by the US Federal Reserve, not to mention the fact that we are in an election year. This could see the government not taking any major reform measures,” says Arun Kejriwal, director, KRIS.
Madan Sabnavis, chief economist at CARE Ratings, said, “There has to be very strong growth from September onwards (FII flows), which will be subject to factors well beyond our own control.”
Market circles add that if the Federal Reserve decides to take small steps, it could provide some relief to emerging markets such as India and there could be a strong rally in such an event.
An analyst with a foreign brokerage, who did not wish to be named, said since the stock markets had already factored in the tapering, any announcement was unlikely to have an adverse impact. “Yes, it might be difficult to meet the $2.7-billion target. But it is not impossible. If the Centre and the RBI take some steps that lift market confidence, this forecast could easily be met,” he added.