Last week's announcement by the US Federal Reserve chief that since the US economy was recovering, the quantitative easing that had been keeping it afloat for the last few years would be reduced or stopped from next year, led to a bloodbath in several markets across the world, including India's. There was sustained selling by foreign institutional investors as they turned bullish towards the US market and reduced their exposure to emerging markets. Indeed, in one month, FIIs have sold equity and debt securities worth over $7.5 billion in India. The impact was most felt on the Indian currency which fell to an all-time low of Rs 60 against the US dollar.
Has India thus lost its opportunity to grow big? I put this question to the CEO of a domestic financial service firm, on the sidelines of the CII Mutual Fund summit held in a Mumbai hotel in end-June.? "India has lost a decade," he said bluntly, to my surprise. Pointing to his iPhone, he added: "So many Indians use mobile phones, but show me one big mobile phone manufacturing facility in India. Everything is imported from China. We could have at least made it compulsory for the companies to use a few parts made in India."
He was most disappointed that the policy paralysis in the country prevented it from making use of the opportunity the huge FII inflow of the past few years had offered. Investments could and should have been made in infrastructure or in creating energy security. Now the mood has turned bearish with the huge FII outflow.
The seeming end of the 30-year long bull market in bonds in the US has also contributed. The 10-year US Treasury bond was trading close to 1.6 per cent in the beginning of May, but rose to 2.6-2.65 per cent in the last week of June. Apart from the expected payrolls data, the fall in unemployment rate in the US from 10 per cent in 2010 to 7.6 per cent in June this year and the likely unwinding of the easy money policy by the US Federal Bank have helped sentiments improve towards the US market.
FIIs have been the backbone of the Indian market for the past few years and the sole reason for the buoyancy of the Indian equity market. Even a few additional hundred dollars invested by FIIs have lifted the market to greater heights, improving the market sentiment. With FIIs making a U-turn in June many feel the dream-run for India and the Indian market is over. The bleak GDP growth and industrial production growth make matters worse.
Until now, as the saying goes 'their pain was our gain.' The crisis in West Asia and Europe came as a breather for India earlier. Meanwhile both Bank of England (BOE) and European Central Bank (ECB) have kept rates unchanged. In fact both the BOE and the ECB have been assuring their economies that they are willing to keep rates low for a considerable period of time.
Still, the Eurozone continues to have its own problems with some of the peripheral countries while the UK has just averted a recession. Its economy grew a mere 0.3 per cent in the first quarter of this year. This is a positive for India as there is hope that even if flows from the US slow down, money from the Eurozone will continue to flow in for some more time. Says Deborah Fuhr, Partner and Co-founder of ETFGI, a UK-based independent research and consultancy firm that provide advice on global exchange traded funds: "India is a clear standout compared to other countries. There are very few markets like India in the world which would deliver impressive returns. There is lot of interest in India as it is among the few countries that are still posting strong growth. In the past three years, from 23 providers of exchange traded funds and exchange traded products, the number has grown to 36 at the end of May 2013 and they hold combined assets of $5.6 billion exposure to India."
From a foreign country's point of view India at this juncture is a perfect fit for investment given its weak currency, decent valuations, and also the fact that India is a stable democratic nation. Domestic investors don't think about democracy, but for a FII, 'country risk' is a huge factor before taking investment decision.
Expectations of FII inflows continuing are reflected in the BSE Sensex's recovery. In the past nine trading session, between June 24 and July 5, the BSE Sensex has gained nearly six per cent. This rise has come after a 10 per cent drop in a month from 20,443.62 on May 20 to 18,467 on June 24.
The recovery of the market doesn't suggest that all is hunky-dory for India. The pain regarding the weak rupee, inflation and current account deficit still continues to weigh heavily. But expectations are that FII flows may continue. Our policy makers still have a chance to use of this opportunity. All is not lost.
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