Foreign Institutional Investors (FIIs) have shown caution toward Indian markets despite corporate profit growth averaging 10% annually and nominal returns of ~4% (including dividends and capital gains). This reluctance stems from a complex interplay of macroeconomic, regulatory, and global factors, as outlined below:
Valuation Concerns
Overheated Markets:
- Indian equities trade at premium valuations (Nifty 50 P/E ratio of ~22x vs. MSCI Emerging Markets’ ~12x), making them less attractive compared to cheaper alternatives in China, Vietnam, or Brazil.
Domestic-Driven Rally:
- Strong retail and domestic institutional investor (DII) inflows have buoyed markets, reducing FIIs’ incentive to chase overpriced assets.
Currency and Macro Risks
Rupee Volatility:
- The INR has depreciated ~4% annually against the USD since 2020. For dollar-denominated FIIs, currency losses erode returns, turning a 4% gain into a near-zero real yield.
Rising U.S. Yields:
- With the U.S. 10-year Treasury offering ~4.5% risk-free, FIIs demand higher EM premiums to justify Indian equity risks.
Regulatory and Tax Hurdles
Tax Complexity:
- Ambiguities in capital gains tax (e.g., differing rates for equities vs. debt) and lingering concerns over retroactive tax disputes (e.g., Vodafone case) deter long-term commitments.
GAAR and Compliance:
- The General Anti-Avoidance Rule (GAAR) and strict Foreign Portfolio Investor (FPI) disclosure norms raise compliance costs.
Geopolitical and Policy Risks
Global Shifts:
- U.S.-China tensions and the Russia-Ukraine war have pushed FIIs toward safer assets. India’s neutral stance on Russia and reliance on discounted oil draw scrutiny from Western investors.
Domestic Policy Uncertainty:
- Sudden regulatory changes (e.g., tech sector antitrust measures, export bans) create unpredictability.
Competition from Other EMs
China’s Reopening:
- Post-COVID, China’s cheaper valuations and policy stimulus have diverted FII flows away from India.
Southeast Asia’s Rise:
- Vietnam, Indonesia, and Thailand attract manufacturing-focused FDI, reducing India’s appeal as a “China+1” alternative.
Liquidity Constraints:
- Despite growth, India’s market depth remains limited for large FIIs, risking slippage during exits.
Sector Concentration:
- Reliance on tech, financials, and consumer stocks limits diversification opportunities.
Expert Recommendations to Attract FIIs
Improve Currency Hedging Tools:
- Develop deeper forex derivatives markets to mitigate INR volatility risks.
Simplify Tax Regimes:
- Clarify long-term capital gains policies and streamline GST for foreign investors.
Enhance ESG Frameworks:
- Align with global sustainability standards to tap into $30 trillion+ ESG-focused capital.
Boost Infrastructure Spending:
- Address logistical bottlenecks (e.g., ports, power) to strengthen corporate earnings durability.
FOLLOW:https://newsroom47.com/elon-musk-speaks-following-claims-of-his-13th-child/
Newsroom 47