The government’s announcement on August 23 to roll back the imposition of surcharge on foreign portfolio investors (FPIs) — which was proposed in the Union Budget in July — seems to have failed to rekindle the sentiments on equity investment in India.
In the five trading sessions following the rollback of surcharge, FPIs sold Indian equities worth a net of Rs 5,485 crore from Indian equities as broader concerns around domestic economic growth, slowdown in consumption and threat of escalation of tariff war between US and China played on the investors’ mind.
While the Budget announcement on imposition of surcharge on FPIs in July severely dented investor confidence, and between July 5 (Budget announcement) and August 23 (rollback of surcharge) they pulled out a net of Rs 20,260 crore from Indian equity markets, experts say that investors are now concerned more about the basic fundamentals of the Indian economy, including the consumption growth, and therefore the surcharge rollback may not reverse equity flows as of now.
“There is a bit of pessimism on growth, corporate earnings and problems surrounding NBFCs. Both domestic and foreign investors are concerned over the fundamentals of the economy. I think that the stimulus measures being announced by the government may not have the desired impact till the overall sentiments turn positive,” said CJ George, MD, Geojit Financial Services.
The CIO of a leading mutual fund said that a decline in private consumption and lacklustre growth in direct tax collection in the first five months of the current fiscal have raised concerns in the market. “A dip in private consumption and low inflation is hurting the corporate earnings growth. Slow pace of growth in direct tax collections has also raised concerns over the government’s ability to use RBI’s additional dividends for capital expenditure.”
As both FPIs and domestic investors turned wary of slowdown in the economy, the broader markets have lost significantly. Against the Sensex fall of 5.6 per cent in July-August, the BSE mid cap and the small cap indices have lost 9.2 per cent and 12.2 per cent.
However, there is some hope going forward, said the CIO, pointing towards expected ease in liquidity situation and revival of the consumption growth. “The RBI has started providing liquidity and revival should begin in the October-December quarter. While cyclically we are at the bottom as of now, I am hopeful that we will end the current financial year in a better position,” he said.
There are some who added that the Centre’s latest reform measure to merge six relatively weaker public sector banks into four stronger ones will be beneficial in the long run, though it may block credit disbursal by these banks in the near term as decision making will get impacted.
“There is a slowdown in the economy and private consumption and investments are down, and at a time when you need to lift the economy and increase the credit flow in the short-term, you take a decision that will block the credit in the short term,” said the head of the financial services firm.
He, however, added that it will have big benefits in the long run. “Bigger banks have better technology at their disposal and they work more efficiently and so merger of smaller banks with bigger banks will create banking institutions that are more robust and that operate more efficiently.”