PremiumThis ‘buy India sell China’ indicates FII’s inclination to invest in a relatively stable market, Manishi Raychaudhuri, Asia-Pacific head, equity research and Asian equity strategist, BNP Paribas, said in an interview
NEW DELHI : Foreign institutional investors (FIIs) bought Indian shares between mid-July and early-November, but sold positions in China. This “buy India sell China" indicates FII’s inclination to invest in a relatively stable market, Manishi Raychaudhuri, Asia-Pacific head, equity research and Asian equity strategist, BNP Paribas, said in an interview. Edited excerpts:
India’s stock market outperformed other emerging markets (EMs) and developed markets (DMs) despite FII selling. The benchmark bond yield and Nifty equity yield gap has narrowed. Will this trend continue?
India’s outperformance relative to EM and DM peers has come about because of its economic and corporate earnings growth being more stable than those of EM peers. The nature of India’s economy ensures that earnings are not too sensitive to demand retrenchment and an eventual recession in DMs.
How long will the recession in EU or the US last? How will it impact India?
Our global economics team forecasts a recession in Europe and US, the latter to start in Q2 2023. The pressure on EMs could be significant. In earlier recessionary episodes, Asian equities fell 40-60%. In the present episode, however, a severe DM slowdown was anticipated and MSCI Asia, ex Japan, is down 45% from its February 2021 peak.
Will the Reserve Bank of India (RBI) be able to slow the pace of rate hikes, if the US Federal Reserve continues to hike rates aggressively?
Inflationary pressure in Asia, including India, is lower than in the US. For instance, in China the latest October Producer Price Index (PPI) print was negative. We don’t expect central banks of most Asian economies, including India, to hike rates as much as the Fed has done.
How long will the RBI use reserves to defend the rupee?
BNP economists expect the Fed to hike rates by 75 bps in December and by another 50 bps in Q12023. Simultaneously, accelerated quantitative tightening seems likely to continue for the foreseeable time. Against this backdrop, EM currencies, such as the rupee, should remain under pressure against the US dollar for 3-6 months and RBI’s efforts to smoothen the volatility of the rupee should also continue.
Some experts have said that FIIs might turn net buyers after being sellers in FY22. What is your view?
Mid-July to early-November, barring September, FIIs have turned buyers of Indian equities and have sold onshore Chinese equities through the Northbound Stock Connect link. This “buy India sell China" trade indicates FIIs’ inclination to invest in a relatively stable market when markets, reliant on demand from DMs and amid domestic policy uncertainty, are severely impacted.