After a terrible start to the year, India’s foreign investment inflows have finally rebounded

• Between April and June 2018, foreign investors withdrew ₹610 billion from India’s capital markets.
  
• However, a renewed confidence in India’s economy has culminated in a back-to-back monthly inflows in July (₹23 billion) and August (₹52 billion).
  
• The rebound follows an improvement in macro-economic growth indicators and corporate earnings as well as a positive report from the IMF in early August.
  

In terms of foreign portfolio investment, 2018 hasn’t been a great year for India. In the first six months of the year, the country experienced its highest level of investment outflows in ten years, largely due to the fact that investors withdrew ₹610 billion from April to June.

The reasons for this had to do with a pessimistic view of India’s short-term growth trajectory, as indicated by a depreciating currency, a widening fiscal deficit, rising oil prices and concerns of a global trade war. A gradual tightening of interest rates in the US has also rerouted inflows back to this safe haven.

However, in the last few months, it seems that these worries have subsided slightly. A renewed confidence in India’s economy has culminated in a back-to-back monthly inflows in July and August. Following a net positive flow of ₹23 billion in July, foreign portfolio investors pumped ₹52 billion into India’s capital markets in August - 65% of which went into bonds and debt instruments, with the rest going into the stock market.

The rebound follows an improvement in macro-economic growth indicators and corporate earnings as well as a positive report from the International Monetary Fund (IMF) in early August. The IMF gave its stamp of approval to reforms such as improvements to the GST regime and easing of foreign investment protocols. It maintained its medium-term growth forecast for India at 7.8%, which will make it the world’s fastest-growing major economy.

The reversal in inflows also coincides with a bull run in India’s equity markets. The Sensex has been on a record spree since July as domestic institutional investors have filled in the demand gap caused by the exodus of foreign investors.

However, while a rebound in foreign portfolio investments bodes well for India’s short-term prospects, the quantity of inflows still aren’t sizeable to sufficiently stem the rupee’s decline. However, this is also a symptom of a larger currency crisis in emerging markets, most notably Turkey and Argentina, and a renewed interest in safe haven markets.

While there is a still a significant amount of wariness among foreign investors, India’s recent quarterly growth figures - an 8.2% GDP growth in Q1 - and a burgeoning market for stressed assets could result in larger inflows in September. In addition, the Indian government’s move to further ease the foreign investment process by introducing a single common application form will make it easier for foreign investors to register themselves and invest in debt and equity instruments.