Foreign investors continue to exit Indian markets despite FM stimulus; are global factors responsible?

The stimulus provided by Finance Minister Nirmala Sitharaman, to revive the economy, failed to improve foreign investor's (FIIs) sentiment, as they continued on their selling spree, withdrawing Rs 5,486.95 crore from the Indian equity market since August 23.

Among the slew of measures for various sectors like auto, MSME, Sitharaman also withdrew additional surcharge on long-term and short-term gains made by FIIs and domestic investors, in a hope to improve the overall market sentiment.

However, the foreign investors do not seem convinced just yet, as they continued to exit the Indian stock market. 

The exodus, which was triggered by the imposition of an additional surcharge on the super-rich, resulted in the withdrawal of more than Rs 30,000 crore from the Indian equity market by FPIs between July and August. 

While dismal corporate earnings, liquidity concerns and slowing domestic economy may have played a factor, analysts believe it is the global macros that are keeping the foreign investors at bay.

The government and RBI's decision to transfer Rs 1.76 lakh crore from reserves could rejuvenate the domestic outlook, but global factors may keep the market in the clutches of volatility, they opined.

"FPIs are always on the lookout for value and if they think that Indian markets are overvalued compared to the global peers then they could start selling. Hence, it is indeed the global sentiment which is deciding the mood on the Street. To add to it, a raging trade war between the US and China along with currency and commodity fluctuations also impact the bourses," said Umesh Mehta, Head of Research, SAMCO Securities.

Analysts believe that the government's decision to remove additional surcharge has improved FII sentiment, which will further nourish if the Centre relaxes long-term capital gain (LTCG) tax that was introduced last year. 

"The FPI clause which levied a higher surcharge was one big factor which, along with the LTCG tax last year, contributed to this regular outflow. While one part has already been relaxed, we can expect some relaxation on LTCG tax. This can probably be done by placing it on par with the calculation of immovable assets by increasing the non-taxable tenure to 3 years (true long term), as is already being rumoured on the street. These two factors should help stop the outflow," said Vinay Pandit, Head - Institutional Equities, IndiaNivesh.

The sentiment was reiterated by investment guru Mark Mobius, who expects India to grow in the long-term if the country resolves taxation issues.

"India's slowdown is because of internal and external factors. 50 percent of India's problems are indigenous. We will look for lower taxes in India and bringing in foreign investors in infrastructure will be key," said the merging markets fund manager in an interview with CNBC-TV18.

Global events that could boost FII investment in the Indian markets:

Analysts expect a further rate cut in the upcoming US Federal Reserve meeting on September 17-18. 

The US counterpart of RBI had already cut rates in July by 25 basis points. This was the first rate cut in 11 years.

At the annual Jackson Hole Summit on August 23, US Federal Reserve Chairman Jerome Powell's comments hinted that the July rate cut was for a “midcycle adjustment” and not a start of an interest rate cutting cycle.

According to analysts, another 25 basis-point cut is imminent.

"Theoretically, a rate cut in the US should be positive for developing economies such as India, which have higher inflation and, thereby, higher interest rates in comparison to developed economies such as the US and Europe," said Abhishek Bansal, Chairman, ABans Group.

"As a result of the rate cut, FIIs could borrow money in the US at low-interest rates in dollar terms, and then invest that money in bonds of Indian rupee denomination to earn a higher rate of interest," he said adding that RBI may follow suit to maintain the difference between two nation’s interest rates.