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IPA Special

Policy Uncertainty Makes FIIs Wary Of India

MUMBAI: Foreign institutional investors (FIIs) are increasingly getting edgy as recent policy actions, or the lack of it in several cases, have dampened their enthusiasm to buy Indian shares.
Tax uncertainty due to the proposed general anti-avoidance rules (GAAR), policy flip-flop on foreign direct investment (FDI) in multi-brand retail, rollback of rail fare increases, status quo on petrol prices, the Coal India fuel supply penalty issue and the telecom regulator’s proposals for a steep increase in spectrum prices have not gone down well with them. As a result, net inflow from investors abroad into Indian shares have come down to a trickle in recent weeks. After pumping in about Rs 44,037 crore in the Indian stock market in the first three months of this year, FIIs pulled out Rs 582 crore in this month till April 25, showed Securities and Exchange Board of India (Sebi) data compiled by the Business Standard Research Bureau.
The National Stock Exchange (NSE) benchmark, the Nifty, which delivered 15 per cent returns in the first three months of 2012, has fallen two per cent in this month so far. The 50-stock index closed down 0.25 per cent at 5,189 on Thursday.
“FII volumes have dried up amidst so much uncertainty and confusion. The depreciation in the rupee is another indicator of changing perceptions of India as an investment destination,” said Nick Paulson-Ellis, country head, Espirito Santo Securities (India). “Record high oil prices in rupee terms cause a double whammy of decreasing GDP (gross domestic product) growth whilst increasing inflation. That is outside anyone’s control. But the fiscal position and meaningful progress on important areas of policy and reforms are all areas within the control of government, as is having a fair and consistent tax and regulatory environment, without retrospective amendments,” he added.
The rupee, which closed at 52.54 yesterday, has fallen 7.3 per cent from its recent high of 48.69 touched on February 3.
Paulson-Ellis also blames “opportunistic opposition” coming in the way of economic reforms in India. “There are serious issues that need addressing, and they require consensus building across party lines and more constructive politics from all sides. It would be a grave mistake to assume foreign investment will just keep coming, regardless,” he said.
Global rating agency Standard & Poor’s, which revised India’s long-term rating outlook yesterday to negative from stable, also expects only modest progress in fiscal and public sector reforms in India, “given the political cycle — with the next elections to be held by May 2014 — and the current political gridlock.” The rating agency said its negative outlook signals at least a one-in-three likelihood of the downgrade of India’s sovereign ratings to “junk” status within the next 24 months.
Foreign brokerage UBS is of the view that regulatory risks across sectors warrant de-rating of Indian shares. “We believe that increasing regulatory risks across sectors such as telecom, mining, oil & gas, and international taxation is likely to dampen business confidence, investment sentiment, and foreign flows (direct as well as portfolio),” said Suresh Mahadevan, managing director and head of equities, UBS Securities (India), in a strategy note yesterday.
“This, coupled with reduced confidence on government’s ability to undertake reforms, warrants a further de-rating of Indian stocks in the short term. We also believe the currency and current account could be under pressure in the short term due to flows.”
Within Asian markets excluding Japan, UBS downgraded India to ‘neutral’ from ‘overweight’ last Friday. It now prefers China to India.
Another influential foreign brokerage CLSA also reduced its one-year Sensex target to 19,000 from 20,000 last week. “The excitement around interventions by the Prime Minister’s Office (PMO) to better direct policies has turned out to be a non-starter, evident in the near-zero penalties for a potential under-delivery by Coal India,” CLSA’s India strategists said in their report. “Unless the investment sentiment improves, which requires affirmative policy action from the government, downside to GDP growth for FY14 and beyond appears likely.”

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