Foreign Investors Pull Out 3800 Crore in January – Tracing Causes, Concerns and Corrections

Last Updated at: Nov 04, 2019
Foreign Investors Pull Out 3800 Crore in January – Tracing Causes, Concerns and Corrections

Foreign investors pulled out Rs. 3,800 crore from the Indian capital in the January month as lower prospects of growth in Indian economy when compared to other emerging market. Due to demonetisation decision, the growth is compromised to limited liqidity in consumer’s hands and slump in real estate and automobile sector.

What is said to be the worst year for foreign investment since 2002, the data for January revealed that Foreign Portfolio Investors (FPI) withdrew money amounting to Rs. 3800 crores. In comparison, they invested only about Rs. 243 crores in the debt market. Taking a look at the annual statistics, overseas investors pulled out over Rs 83,000 crore from the capital markets in 2018, after investing a high sum of Rs 2 lakh crores in the preceding year. In the following parts of this post, we examine the reasons for such eyebrow-raising pullout this year and also cast light at favourable factors that attract foreign investors.

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1. The unpredictability of an election year: While India anticipates the elections in June this year; investors fear the instability in the months that precede general elections. While the interim Budget looked promising, the full budget is expected to come out in July, once the new government is formed. Thus, the uncertainty in political outcomes generally affects the business front by adding to investors’ wariness.

2. Rupee depreciation and crude oil price rise: The year 2018 is dotted with innumerable instances of rupee devaluation, making it one of the worst affected currencies in Asia last year. It reached an all-time low of 74 against the dollar. While the increase in the crude oil prices is quoted as the biggest reason for the dip in the rupee, the overall strong demand for US dollars also added to it.

3. Hike in interest rates in the US: The investment potential for foreign investors in India came under pressure because the US Federal Reserve hiked interest rate which made the US treasuries more attractive and also boosted the dollar. While India may be the fastest growing economy in the world, Fed rate hike affected India because the US is the world’s biggest economy and the world’s primary reserve currency is still the dollar.

4. Introduction of long-term Capital Gains Tax in 2018: Last year’s budget was a game changer as it sought to tax the huge economic gains that investors could reap due to equity returns. In fact, the tax-free nature of investments in equity in India was a major attraction to foreign investors. However, with the introduction of long-term capital gains tax, investors would consider possibilities of parking their funds in another economy that may not tax them on the equity investment.

5. The overall and singular threshold limits to investment: Last year, a notification was released that stated that FPI exposure could be to a maximum of 50% of a bond issue. The regulation also provided that a single corporate entity from overseas could not have more than 20% of the issue. This dissuaded overseas investors who may have wanted to have greater ownership and investment in a bond issue.

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Towards an upward trajectory

Last week, the Reserve Bank of India has relaxed the provision that barred FPIs from having more than 20% exposure of their total corporate bond portfolio towards a single corporate entity. We are likely to witness greater participation from FPIs now across different corporate bonds.

With the likelihood of a stable government being formed mid-year, the other half of this calendar year is likely to record better investment statistics from FPIs. Moreover, clarity in the final budget, rising consumer sector’s growth in India and the government initiatives towards reducing non-performing assets, faster insolvency proceedings and our leap to Rank 77 in the Ease of Doing Business ranking, may strengthen investor confidence in the Indian economy.

Since the starting of the year, FPI’s are taking money from equity and debt market. The expectation of GAAR, trumponomics and demonetisation altogether have leaded to blow the FPI investments in India. These three are the reasons to take FPI captital to the US back. According to the research, the FPI allocations will remain cool in the coming months.

Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.