FPIs not likely to rush back to Indian market: Akshay Thakurdesai, BNP Paribas

FPIs have pulled out nearly Rs 1.14 lakh crore from secondary markets in the current calendar. What prompted this outflow?

FPI outflows from India can be attributed to multiple factors including trimming of relative overweight positions with respect to other emerging markets(EMs).

The global trend of equities being sold on account of rich valuations witnessed in the last 2 years, coupled with a strong dollar Index does not bode well for the EM equities and the Indian market has been facing the consequences of this risk reversal move.

But that said, the domestic institutional flow, along with retail/HNI buying, has cushioned the FPI selloff. This underlines the new trend of local investor confidence in the markets and their willingness to weather out a few rough overs.

How do you see FPIs sentiments in the backdrop of the recent rate hike ?

Since the end of 2021, most central banks had started unwinding liquidity support / raising rates but the RBI had chosen to rather support the economic recovery as their inflation expectations remained benign. But the emergence of geo-political tension in Europe and the consequent rise in inflation expectations changed the whole backdrop, which necessitated an emergency response from the RBI in the form of an intermeeting rate hike. We believe that FPIs appreciate this change of stance in the given backdrop. If such a step was not taken, while the US Fed was largely expected to hike rates by 50 bps in the March meeting, it would have resulted in incremental pressure on the currency.

For FPI flows into Indian equities, we believe the key theme of moving money back from Emerging Market (EM) assets into the US dollar (USD), would continue for some more time as the US Fed works to reduce its balance sheet.

What is your outlook on the FPI flows?

We believe that, after the large selling spree of the last few quarters, FPIs may not necessarily rush back to the market but there is a question mark on how much more they would sell off from here. The Indian economy continues to be relatively insulated from global turmoil. While quantitative tightening may begin soon in the US, one would factor in the selling in the run-up to the event and watch for signs of the flow abating in the second half of this year.

While FPIs have been net sellers in the past six months, in April, they have been net buyers infusing almost Rs 7,000 crore into Indian equities. It would be too early to say that the trend is reversed, but we can be optimistic about the fact that the reclassification of portfolios is behind us given the current global scenarios.

What is your view on allowing FPI into commodity derivatives?

We believe it’s a very positive move and it augurs well for the commodity derivatives market as it will increase the depth and liquidity of this segment. Initial reactions from the FPI community look positive and we all are awaiting for the formal announcement on the regulatory and operational requirements. This will further add up to the product palate available for the FPIs, and puts India on a level playing field with the other developed markets.

The new T+1 settlement scheme has come into effect. Initially, FPIs had a lot of apprehensions over the shorter settlement. How is the T+1 system working?

FPIs in India, largely trade in the top 500 stocks and so they have time till September or October 2022 to ensure they are ready for the changes. Many FPIs had initially expressed concerns on T+1’s implementation especially because of the difference in time zones and multiple intermediaries involved.

Under the new settlement cycle, the FPIs would have to predict the entry price and pre-fund (early pay-in) for their transactions. Further, since they invest in India from different time zones, it could also be a challenge for them to obtain permissions for stock transfers and other procedures from their respective custodians or head offices.

To help mitigate these challenges and make trading in India a smooth process, the new settlement process will be implemented by the stock exchanges in a staggered manner, which comes as a breather for the market participants.

How is India faring in terms of new FPI registrations?

New registrations of FPIs saw an uptick in January and February 2022 (as per SEBI bulletin March 2022) as buoyant market conditions have spurred the setting up of funds focused on India and emerging markets. More than 100 registrations are trending within the custodians taking the total number of FPIs to 10,658.

The recent rise in FPI registrations mirrors the buoyant flows into Indian capital markets. Emerging markets in general and India in particular have rebounded sharply and witnessed a significant interest from investors. Many global funds, especially emerging market-focused funds, are queuing up for FPI registration.

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