CLSA On Why FPI Inflows Will Double To 1% Of GDP

Foreign portfolio investment inflow into the country will double to 1% of GDP, aided by strong forex reserves and domestic bonds' inclusion in JPMorgan's Emerging Market Global Bond Index, according to CLSA.

The Reserve Bank of India has built up forex reserves to an adequate level of $600 billion, which will likely limit annual depreciation to 2.5% from 5% in 2010–20, it said in a note on Thursday.

"This, in turn, should push up FPI flows to an average of 1% of GDP from 0.4% between FY14 and 2022." The forex build-up has not only made the rupee depreciate to just 0.4% in the last 12 months but has also held up against peers, it said.

Equity FPI flows averaged 1.2% of GDP in 2004–08, as a high 14-month import cover strengthened the rupee. As the forex reserves came off to seven months in FY12–14, an 11% rupee depreciation pulled down equity FPI flows to 0.2% of GDP between FY15–23, CLSA said.

With the rupee stabilising, India's weight in MSCI is rising to 18% in February this year from 7% in December 2014, the brokerage said.

The listing of Indian government securities in the JPMorgan Emerging Markets Bond Index should increase FPI debt investments by $21 billion by March 2025, the note said.

In January, Bloomberg Index Services proposed to include Indian bonds in its Emerging Market Local Currency Indices, starting in September this year.

"While India has benefited from rebalancing from China as well as bond inclusion, we believe that FPI flows are reverting to pre-Great Financial Crisis levels."

The bond index inclusion should also crowd in debt FPI investment in corporate debt, CLSA said.

Foreign portfolio investors infused Rs 16,559 crore in the debt market in February, according to data from the National Securities Depository Ltd. The previous highest monthly inflow by FPIs was recorded in June 2017, at Rs 25,685 crore.

So far this year, inflows to the debt market stand at Rs 36,396 crore, according to data from NSDL.