Foreign flows to turn erratic

As highlighted in the main story, foreign portfolio investors were the driving force behind Indian equity until 2014. But there has been a reduction in FPI flows since 2015 and this can be linked to the monetary policies of the Federal Reserve. Investors from the US bring in the highest amount of funds in to India — they held ₹9,72,591 crore of stocks towards the end of February 2018, accounting for 35 per cent of the total FPI holding in Indian equity.

It is for this reason that FPI flows into India are affected by Fed actions. As the Fed pumped in over $3.5 trillion worth of money in to the US economy through bond purchases between 2009 and 2014 and reduced its interest rates to close to zero, FPI flows into India also hit record highs. With the tapering of the QE program in 2015 and the gradual hike in Fed fund rate since December 2015, FPI inflows into India have declined.

With the Fed beginning its balance sheet reduction in October 2017 and on course to hike rates two to three more times this year, borrowing conditions in overseas markets are expected to tighten further.

But easy money policies followed by other major central banks can counter the Fed tightening to some extent.

For instance, the European Central Bank is continuing to maintain rates at close to zero. It has also stated that monthly asset purchase worth Euro 30 billion will continue until this September. The ECB also remains inclined to support growth through easy monetary policy for as long as needed.

The Bank of Japan is also continuing with its near zero interest rates, given the stubbornly-low inflation in the country and continues to pump stimulus money every month. The Bank of England has however begun raising rates, with the first hike done last November. Also, the Trump tax plan can increase the US deficit and help increase liquidity in US.

Besides central bank policies, benign growth outlook also supports global flows into emerging markets. According to the IMF, global growth has been good in 2017, due to upside surprises in Europe and Asia, making it revise its forecast for 2018 and 2019 higher to 3.9 per cent. Improving global trade, higher manufacturing output and the positive impact of the tax cuts proposed in US are other factors supporting growth.

The flipside is that steep valuation makes financial markets vulnerable to price correction and the trade war that is looming ahead has the potential to derail global markets.

While FPI flows can turn erratic in the coming months, desi money can act as a counter.

ALSO READ: Desi money to fuel stock market

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