Flowing outhttps://indianexpress.com/article/opinion/editorials/flowing-out/

Flowing out

Capital outflows are not a cause for concern. But to attract dedicated flows, India will need to step up reform.

Since May, foreign portfolio investors (FPI) have been net sellers in Indian stock markets practically every month barring two, July and October. During the year just ended, their net investment in equities here was just under $3.2 billion, compared to $16.1 billion for 2014. But the outflows seen over the last eight months or so aren’t comparable to the huge FPI sell-off that happened during June-August 2013, which also saw the rupee slide below Rs 68 to the dollar. The latter had to do with reasons that were India-specific, related to the country’s seemingly intractable current account and fiscal deficit problems, coupled with concerns over the then UPA regime’s policy paralysis and the Vodafone retrospective tax mess. The current FPI selling, by contrast, is not as much about India. True, there are no tangible signs of a growth and investment pick-up yet; nor has the present government delivered on big-ticket reforms. Yet, India’s macroeconomic indicators are better than most emerging market economies’ (EMEs) today and the “twin deficits” no longer pose the worry they did two years ago.

The FPI sell-off happening now is mainly on account of largescale redemptions by sovereign wealth funds (SWF), especially from some of the oil-rich economies. The slump in global oil prices has resulted in diminishing surpluses that these nations were funnelling into EMEs through SWFs. But with their own finances now under pressure, the SWFs are compelled to redeem their investments. That, along with the US Federal Reserve raising interest rates and concerns over a deepening Chinese slowdown, has led to risk aversion among global investors, triggering outflows from all EMEs. India is not being singled out in this case, unlike in 2013, when it was particularly vulnerable to capital outflows following the Fed’s first indications of ending its extraordinary monetary stimulus or quantitative easing programme.

Significantly, the Indian markets haven’t fallen all that much this time, despite all the FPI selling. One reason is the control on inflation, which has driven even local investors to move away from deploying money in gold or real estate to financial savings instruments. This is reflected not just in bank deposits going up, but also a 20 per cent annual increase in assets under the management of domestic mutual funds. That is, of course, a healthy trend providing insulation for the markets against the sell-off by FPIs. But this should not be reason for complacency or blaming the hostile world economic environment for continuing weak growth and investment activity at home. According to global fund managers, India today holds the potential to attract dedicated flows, rather than being lumped together with other EMEs, if only the Modi government is able to push through more decisive reforms. They are not wrong.