Foreign investors are losing confidence in India’s short-term growth prospects
AdvertisementGlobal oil prices are rising, the Indian rupee is depreciating, the government’s current account deficit is increasing. Government bonds are becoming riskier investments, and now, foreign portfolio investors are exiting
From May 1st to May 25th, foreign investors pulled out a total of ₹267.7bn from Indian bonds and stock-markets, according to depository data. As a result, the total outflow is on track to exceed the ₹271.1 billion that they pulled out in December 2016 - the month after the government imposed its demonetisation initiative. This will be the highest outflow of foreign money in 18 months.
The investor panic after demonetisation was short-lived, as
However, the outflow of foreign investment has been consistent in 2018 so far, pointing at a deeper malaise and lack of confidence in India’s short-term growth trajectory. In April, foreign investment outflows totalled ₹155bn, a 16-month high. In addition, March yielded a meagre net inflow result of ₹26.5bn, only due to
Rupee set to weaken further
As foreign investment continues its downward spiral and oil prices increase, the rupee will only weaken further as there are less foreign investors entering the economy and buying rupees. The Reserve Bank of India is trying to do its best to stem the fall, by using up its dollar reserves to prop the currency, but as its foreign reserves dwindle, its ability to intervene in the future will be compromised.
This scenario isn’t only limited to India, though. After years of low interest rates in the US and across Europe, money came from these countries into emerging markets in Asia and South America in search of higher returns. However, as interest rates in these developed markets are on the upswing, less money is leaving them.
Paul Krugman, a Nobel Prize winning economist, raised alarm bells last week, when he pointed to an impending crisis in emerging markets, based on the drastic decline in currencies, the pileup in dollar
For now, foreign investment in India is tied to the country’s growth rate over the next few quarters, which is in turn, tied to oil prices. If India exceeds quarterly growth estimates, it will be able to lure investors back. However, with oil prices set to hover around $80 a barrel a near term, maintaining growth, let alone exceeding predictions, will be extremely difficult.
It seems that foreign investors will continue to pull money out in the near term. As a result, the Indian government will have no choice but to rely on demand and investment from domestic entities to keep the bond and stock markets afloat.
Popular on BI
- Financial inclusion made easy for India’s small merchants with Paytm’s pioneering QR codes and Soundbox
- With Rupay Credit Card on UPI, mobile payments pioneer Paytm deepens its leadership in UPI
- A 24-year-old stock trader who made over $8 million in 2 years shares the 4 indicators he uses as his guides to buy and sell
- 10 Must-Do activities on your next Darjeeling Trip
- Govt received ₹1,70,501 crore in April as revenue
- Shubman Gill, Sunil Narine, Virat Kohli & more: IPL man of the series winners since 2008
- Five personal finance deadlines you can’t afford to miss in June
- List of famous things to buy in Darjeeling