Finance Minister Arun Jaitley has said that the credibility of the Indian economy has been partly restored, but however added that the momentum must be sustained over the next two years to win over and provide comfort to the world investors stated media reports. The minister was in San Francisco, USA to lead the International Yoga Day celebrations and said there a huge amount of enthusiasm among investors overseas as they see India picking up again after 4-5 years of slump.
The reasons for this enthusiasm from investors he said was the reform process being clear, the government’s thinking being clear and a lot of changes which are in the pipeline. The second reason he said was the world economy not doing so well and India being a place which they find to be growing faster. Jaitley finally added towards the end that there is one thing investors all over the world don’t like, it is uncertainties and therefore he said their policy domain has to be predictable, it cannot have any surprises.
While the Finance Minister spoke about optimism regained by investors for the Indian market, this optimism has largely been seen in domestic investors as foreign investors continue to pull out of the Indian market. Just yesterday data released by depositories showed that foreign investors have pulled out more than Rs.3,300 crore so far this month from the Indian stock exchanges. The reason for this is that the Foreign Portfolio Investors (FPIs) are looking at better returns from other Asian markets like China, concerns over a slow revival in corporate earnings and continued worries over the Minimum Alternative Tax (MAT) being levied on foreign investors by the government. FPIs made gross purchase of shares during June 1-19 to the tune of Rs.78,914 crore, while they sold stocks worth Rs.82,248 crore in the same period. The investment by FPIs month-on-month too is seeing a slide since the start of the year as in January it stood at Rs.33,688 crore which dropped to Rs.24,564 crore in February and further dropped to Rs.20,723 crore in March, Rs.15,266 crore in April and finally to Rs.14,272 crore in May.
However, Finance Minister Jaitley is not wrong to have an enthusiastic outlook towards investors in the market as many experts expect the FPIs to return to the Indian markets in the medium to long term with things settling down and positive data emerging. “There is nothing to worry about FPIs flight from the Indian stock markets. In medium to long-term, India is an attractive place for investment. FPIs will start investing in our markets when issues of Greece and rate hike by US Federal Reserve sort out,” said Anand Shah, Chief Investment Officer at BNP Paribas recently in a media report. Apart from global disturbances settling down there is far richer data that has emerged recently regarding the acceleration in industrial production growth, easing of food price inflation and data of above-average monsoons. This in turn is expected to further result in monetary policy easing (interest rate cuts) from the Reserve Bank of India (RBI) which is further expected to boost sectorial growth and corporate earnings. This will lead to FPIs once again infusing more money into the markets.
Besides domestic investors have already taken advantage of this and while foreign investors have pulled out they have seized the opportunity to gain back entry into the market at lower levels. This has further helped to soften the blow for the Indian markets due to a sharp sell-off by FPIs. Recent data provided by stock exchanges and Securities and Exchange Board of India (SEBI) revealed that domestic institutional investors (DIIs) had invested more than double the amount sold by FPIs during the last two months. Insurance companies and mutual funds were at the forefront of this and have brought shares worth Rs.18,500 crore since the start of May in comparison to Rs.9,102 crore worth of shares sold by foreign investors in the same period.
The Indian markets are trading 14-15% lower than their peak and the valuations of companies from sectors such as automobiles, industrials, capital goods and BFSI are low right now but are expected grow in the long term making them attractive to domestic investors. Also, with the government increasing the Minimum Support Price (MSP), which is the price at which the government buys agricultural produce from farmers, is something that will bring down inflation. This coupled with some of the other positive data emerging will help in rejuvenating key sectors such as automobiles, BFSI, FMCG, retail, etc. If we see better sectorial growth we can expect more investment to come not only from domestic investors but also foreign investors pushing the growth of the economy further than expected.