In fiscal 2020-21, India attracted a record $81.7 billion in foreign direct investment (FDI), the sole bright light in a year when the GDP is expected to shrink by 8%, the lowest in 40 years. The 10% year-on-year increase in FDI at a time when global inflows are declining is unquestionably remarkable. Global investors are wary of India due to high valuations but are enticed by local family stock purchases, according to Swiss brokerage UBS on Tuesday. They are also concerned about the near-term viability of retail investors’ investments, according to a report, adding that net withdrawals by foreign institutional investors (FIIs) are symptomatic of the same concerns.
According to the report, FIIs have so far withdrawn out USD 1.1 billion on a net basis in the current September quarter, compared to inflows of USD 0.8 billion and USD 7.3 billion in the previous two quarters. Even as FIIs withdraw money from the market, consumers have been “spending significantly” in the market, net purchasing USD 5 billion in stocks in the June 2021 quarter.
According to UBS, retail direct ownership is at a 12-year high. Domestic mutual fund flows have also become positive after four quarters, and the risk of a COVID-19 third wave, vaccine ramp-up, and earnings momentum is crucial to market mood, according to the report. Before the Covid-19 outbreak last March, India’s economy was already slowing. This trend has been evident since the third quarter of the fiscal year 2016-17 when GDP growth began to slow from 8.6 percent to 7.6 percent. It had decreased to 4% in the fourth quarter of the fiscal year 2019-20. Exports, private investment, consumption, and government spending have all sputtered to a standstill in the last seven years.
Given the high valuations, there is limited space for re-rating, it said, adding that if poor absolute returns persist, retail flows may get fatigued, especially because bank deposit rates have most likely bottomed out. The firm also predicted that India’s GDP will expand at a slower-than-expected 8.9 percent in FY22.
Aspects such as the reopening of the economy would result in a 15% quarter-on-quarter rise in GDP for the July-September period, following an 11% decline in the June quarter, it added. According to UBS, India will have immunized 40% of the overall population or 55% of the adult population by December 2021.
Even though the government encourages firms to spend in sectors such as infrastructure, the brokerage does not expect a significant increase in corporate investment in the coming years. It also stated that inflation will average 5.5 percent in FY22, resulting in the RBI maintaining current rates till June 2022.
“The government’s actions on the fronts of FDI policy changes, investment facilitation, and ease of doing business have resulted in increased FDI inflows into the nation. The developments in India’s FDI confirm the country’s reputation as a favored investment destination for global investors “According to a statement issued by the Commerce and Industry Ministry.
However, a closer examination reveals that at least 34% of overall FDI inflows in FY21 may be ascribed to funds invested by worldwide investors in Mukesh Ambani’s Reliance Industries Ltd. The oil-to-telecom conglomerate sold stock interests in seven group firms worth almost $28 billion to international investors, including internet behemoths Facebook and Google. The accumulation of foreign investments in one year raised FDI inflows to record levels in FY21, but this achievement is unlikely to be achieved for the second year in a row.
Even as the global economy is expected to recover from the pandemic’s debilitating effects in 2021, with developed economies such as the United States, the European Union, and the United Kingdom expected to record healthy growth as a result of their rapid vaccination drives, India is expected to lag behind, owing to the pandemic’s second wave and the slow pace of vaccination.
(Source- Media Reports)