Moneycontrol                                                                Published On: Feb 13, 2020

By Rahul Agarwal, Director Wealth Discovery Securities / EZ Wealth

Calendar 2019 witnessed a robust flow of foreign funds into the Indian equity markets as foreign institutional investors (FIIs) pumped in more than Rs 1 lakh crore (around $14.5 billion) during the year making it their best such infusion in six years.

Prior to this, they had injected a net of Rs 1.13 lakh crore in 2013.

The FII inflow had hit a major setback in July 2019 after the introduction of an additional surcharge on foreign portfolio investments. However, after the government rolled back the contentious surcharge in September 2019, FII’s inflow saw an uptick.

FIIs have infused close to Rs 50,000 crore in the last 3 months of last year. The positive FII inflow in Indian capital markets in 2019 was a major reprieve over the year 2018 which had witnessed the biggest FII outflows in the Indian capital markets history.

The steady inflow of FII funds into Indian equity is expected to sustain throughout 2020 for a variety of reasons. It is expected that emerging markets (EM) growth will pick up given the aggressive policy intervention across EM economies that are supportive of sustainable economic growth.

Indian economy is widely expected to have bottomed out in the last quarter and recent macro data only strengthens the belief. With an aggressive push towards massive infrastructure spend and meaningful interventions to spur consumer demand the twin-engine of Indian economy, growth and consumption are expected to recover at a faster rate.

As per estimates Indian economy is expected to grow at 6 percent in FY 20-21 which will help Indian maintain its position as the fastest-growing large economy of the world.

Although, the global economy is expected to face some headwinds from the Coronavirus outbreak in China, at this point, it appears that the deadly disease has already peaked and containment efforts have gathered steam. The worst-case scenario and the fears of a global pandemic at this point appear to be subsiding. It can also be deduced that Indian economy would be an indirect beneficiary if situation in China deteriorates any further.

In addition, the Union budget 2020 provided FII’s several reasons to cheer and increase their investments in the Indian capital markets. The long-standing demand of Foreign Portfolio Investors (FPI’s) regarding dividend distribution tax (DDT) has been addressed. The Union Budget has proposed the abolition of the DDT, which will help companies and foreign investors pay reduced taxes. Instead of being subjected to DDT on the dividend payouts, the dividend income will be added to the taxable income, and then taxed on the applicable rate. Thus investors would now be able to claim credit for all taxes paid in India. This move significantly enhances the returns on FPI investments and would make Indian markets more attractive from an investment point of view.

The increase in FPI limit in corporate bonds to 15 percent from the current 9 percent and the proposal to make certain government securities available for foreign investors would also have a positive effect on FPI investments in India.

Investments of sovereign wealth funds in Indian infrastructure sector have been sweetened further in the Union budget 2020. Sovereign wealth funds would now be eligible for 100 percent tax exemption on interest, dividend and capital gains on their investments made in the Indian infrastructure sector.

The year 2020 is likely to be a favourable one in terms of inflows in the Indian equity markets. FIIs are bullish on Indian equities as they offer relatively high long-term earnings growth potential across a variety of sectors.

A favourable policy environment and an attempt to bring in more foreign capital to support India’s infrastructural aspirations from the government has further enhanced the attractiveness of the Indian capital markets. FII’s inflows are expected to increase. However, a lot will depend on further policy reforms and their impact on economic recovery, in addition FII inflows into EM’s and global risk appetite are other factors that may have a bearing on FII inflows into India.

FIIs have remained overweight on India as it has enjoyed better positioning among EM. The size and growth potential of the Indian economy make investments in India especially attractive, this trend is expected to sustain going forward as the Indian economy is on the path of recovery.

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