India's No.1 PU & Degree With Integrated IAS & IPS(UPSC/PSC) Training College.
WHY FIIS ARE TAKING FLIGHT
Syllabus:
GS-3:
Economic Development
Why in the news?
- Despite India’s booming economy, foreign investors shy away due to high valuations and volatile market conditions, favoring cheaper emerging markets.
- Domestic investors, supported by SIPs and market resilience, drive Indian stock market stability amidst foreign withdrawals.
source:studycafe
Focus:
- Despite India’s booming stock market and favorable investment conditions, foreign investors (FIIs) are pulling out, perplexed by domestic investors’ enthusiasm.
- Factors like strong economic growth, robust domestic inflows, and institutional investments should attract foreign capital, but India remains less attractive compared to other emerging markets.
| What are Foreign Institutional Investors?
❖ FIIs are institutional investors investing in assets outside their home country. ❖ SEBI regulates FII investments in India, ensuring compliance with rules and regulations. ❖ RBI maintains investment ceilings to manage FII participation and safeguard market stability. ❖ Fluctuations in FII inflows/outflows can impact stock prices, currency exchange rates, and overall market volatility. ❖ Sectors like technology, finance, and consumer goods often attract significant FII interest and capital inflows. About Foreign Portfolio Investors (FPIs): ❖ Foreign Portfolio Investors (FPIs) invest in markets outside their home countries, including stocks, bonds, mutual funds, ADRs, and GDRs. ❖ FPI is part of a country’s capital account and reflected in its Balance of Payments (BOP). ❖ They typically lack active shareholder involvement or control over invested companies. ❖ SEBI introduced new FPI Regulations in 2019, replacing earlier regulations from 2014. ❖ FPI, often termed “hot money,” is more liquid, volatile, and riskier compared to Foreign Direct Investment (FDI). Impacts of FPI selloff : ❖ FPI selloff leads to depreciation of the local currency as investors repatriate funds. ❖ Weaker rupee raises import costs, particularly for major imports like crude oil, potentially driving inflation. ❖ Exporters may benefit from a stronger dollar, but intense competition limits gains. ❖ Decline in foreign exchange reserves due to FPI withdrawals and dollar appreciation. ❖ Stock market and equity mutual fund investments may decrease. ❖ Higher inflation results from increased import bills, impacting the overall market. ❖ Continued rupee depreciation may prolong FPI outflows, exacerbating negative effects. About Foreign Direct Investment (FDI) :
About Systematic Investment Plans (SIPs): ❖ IP is an investment method offered by mutual funds for investing fixed amounts periodically. ❖ Helps achieve financial goals through disciplined investing. ❖ Done in open-ended funds, allowing flexibility in investment and withdrawal. ❖ No fixed tenure for SIP; can be stopped or continued as desired. ❖ Full or partial withdrawal possible during or after SIP tenor. ❖ Amount can be adjusted up or down as needed. What is a Mutual fund ? ❖ Mutual funds pool money from multiple investors under professional management. ❖ Invests in various assets like equities, bonds, money market instruments. ❖ Income/gains distributed among investors after deducting expenses. ❖ Investors share common investment objectives. |
About Reasons for Foreign Investors’ Reluctance:
- High Valuations:
- Indian stock market valuations are exceedingly high compared to other emerging markets.
- FIIs perceive Indian stocks as overvalued, making them hesitant to invest.
- Comparative Analysis:
- Indian market valuations are significantly higher than those of BRICS nations like Russia, China, Brazil, and South Africa.
- Despite India’s strong economic growth, its market seems expensive relative to peers.
- Market Volatility:
- Volatility in Indian markets, influenced by political events like elections, adds to FII reluctance.
- Recent volatility, including the impact of the BJP’s performance in elections, has deterred foreign investment.
Understanding Factors Contributing to Low FII Inflows:
- Net Inflow Trends:
- Despite favorable conditions, net FII inflows into Indian markets have been minimal, even close to zero.
- Fluctuating trends show inconsistency in foreign investment, with periods of outflows overshadowing inflow phases.
- Market Sentiment:
- Negative sentiments, such as uncertainties surrounding government policies and global economic conditions, contribute to FII hesitance.
- Recent events like rumors of increased import duties and the Chinese market crash have further dampened investor confidence.
About the Role of Domestic Investors:
- Resilience in Market Fluctuations:
- Domestic investors have played a pivotal role in stabilizing Indian markets during crises like Covid-19, wars, and economic downturns.
- Their resilience and consistent investments have countered the impact of FII exits.
- Systematic Investment Plans (SIPs):
- The popularity of SIPs among domestic investors has provided stability to Indian markets.
- SIPs encourage regular investments, reducing the impact of market volatility and ensuring long-term returns.
Implications and Recommendations:
- Market Diversification:
- FII diversification into cheaper emerging markets is a prudent strategy amid India’s high valuations.
- Expanding investment portfolios to include more cost-effective options can mitigate risks and optimize returns.
- Embrace Systematic Investment:
- Advocating for systematic investment approaches, like SIPs, can attract more domestic and foreign investors.
- Regular investments reduce market timing risks and promote a disciplined approach to wealth creation.
- Long-Term Prospects:
- Despite short-term challenges, India remains an attractive destination for long-term investments.
- Stable domestic inflows, resilient market behavior, and favorable economic fundamentals position India as a relatively safe haven among emerging markets.
Way Forward:
- Investment trajectory may not immediately improve, but government initiatives like Make in India, IBC, single window clearance, and automatic routes for foreign investments aim to enhance the business environment.
- Instances like Walmart’s acquisition of Flipkart show foreign interest in India.
- Make in India will gradually attract investments as MNCs establish facilities.
- Decline in investments may not be accurately reflected due to MNCs’ borrowing patterns and non-listing on domestic exchanges.
- Government’s efforts to address NPAs and improve credit flow are promising.
- Productive and sustainable investments are crucial for long-term growth, avoiding misallocation.
- Structural reforms and policy revisions are necessary to remove investment bottlenecks.
- Removing barriers like the 20% promoter holding requirement can encourage retail investor participation.
- Continuous liberalization and support for domestic firms are vital for reversing investment slowdown.
- Ensure consistency in economic
Conclusion:
The paradox of foreign investors neglecting India’s booming stock market underscores the significance of domestic investor participation and strategic investment approaches.While short-term challenges persist, India’s long-term growth prospects and market resilience make it an enticing destination for both domestic and foreign investors, despite current valuation concerns.
Mains Practice Question:
Critically analyze the paradox of foreign investors neglecting India’s booming stock market despite its robust economic growth and favorable investment climate. Discuss the factors contributing to this paradox and evaluate the role of domestic investors in stabilizing Indian markets. Suggest measures to enhance foreign investor confidence and optimize investment inflows into India’s stock market.(Word limit: 250 words)
