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FPI’s strategy for 2020: Cautious on fiscal math amid fears a rating downgrade

R Basil

Q. Data shows foreign investors have turned net sellers for India’s sovereign bonds during the last four months. What do you think is the reason?

A: It is because of the flattening of inflation expectations; currently food prices have been constituting a key concern and so has the potential impact of globally elevated oil prices, which is driving domestic inflation. I think this situation is fluid, and you may see a reversal based on views on these subjects evolving over the next few weeks.

Q. Do we see this outflow trend reversing or the sentiment changing any time soon?

A: It is more of a wait-and-watch situation as foreign investors’ concerns are not addressed by regulators and the Government of India in Union Budget 2020. If authorities take enough measures, such as pushing the issuance of dollar and masala bonds by Indian companies or issuing offshore sovereign bonds themselves, we may see flows coming back to India.

Q. Due to the US-Iran conflicts or Coronavirus outbreak in China, do we see such geopolitical and health tensions indicate more fund outflows from or a halt of fresh inflows into India?

A: No. I do not believe they will stop, but they will surely be recalibrated. India is not treated as a ‘safe haven’ and flows at such uncertain times are into safe havens. That explains the buoyancy of the USD and US equity markets.

Q. What other issues concern FPIs currently when it comes to investing in Indian markets?

A: Transaction costs, the eclectic and segregated settlement mechanism leading to transaction delays and limited liquidity in the credit space are ongoing concerns, along with withholding taxes. The major concern, however, stays intact. It is the Indian fiscal arithmetic not matching estimations provided by the government, thus inviting headwinds of rating agencies probably by late-2020.

Q. What is your take on Union Budget 2020?

A: It was a non-event budget as revisions made in a bid to attract foreign flows are not adequately thought of. Thus, nothing significant, but optical projections of reigning in the fiscal numbers, is yet to be witnessed. The Indian fiscal situation is precarious, and I do not see it change unless India chooses to borrow handsomely in INR from overseas.

Q. Market reports are talking about relaxing the norms for Indian companies to borrow from the offshore market, thus boosting foreign flows. What are your thoughts about the development?

A: You will hear bits and pieces – nothing structural – and that is a constant frustration and disappointment for international observers and stakeholders like myself.

Q. Which sector/segment would you see as an attractive investment opportunity in the current slowdown scenario?

A: High-grade and mid-tier credits from the infrastructure, manufacturing and financial services space

Q. What would your 2020 investment advice/strategy be for India?

A: The prevailing Indian economic picture warrants offshore observer or advisor from being cautiously optimistic for now as various things, including headwinds from global rating agencies, fiscal stance and economic growth in the nation, are considered. Imminent measures and data on the nation’s economic and fundamental trends will give better clarity to global investors over India’s standpoint.

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