While the withdrawal of FIIs poses challenges, it also presents an opportunity for India to strengthen its economic fundamentals.
Nilesh Shah, Managing Director of Kotak Mutual Fund, recently discussed the current trend of foreign institutional investors (FIIs) withdrawing from emerging markets, particularly in light of attractive risk-free rates in the US. He emphasized the need for India to concentrate on enhancing its GDP growth, corporate earnings, and governance standards to attract global investors back to its markets.
Current Market Dynamics
Shah explained that FIIs are currently retreating from emerging markets, largely influenced by the substantial weight of China within these markets, which has not delivered satisfactory returns over the last 17 years. The ongoing trend of investors pulling out has been exacerbated by the impressive performance of the US market, leading to a reevaluation of emerging markets as a viable investment option.
The Case for India
Despite the challenges, Shah highlighted that India has performed well, with the Nifty 50 index delivering an 11% dollar return over the past five years, closely mirroring the Dow Jones’s 11.37% return. This performance indicates that Indian markets are competitive on a global scale, even if they haven’t shone as brightly in the past year.
The Impact of US Interest Rates
The attractive risk-free rates in the US present a compelling case for FIIs to reconsider their investment strategies. With rates at 4.5-5%, many investors are tempted to shift their focus away from emerging markets, including India, towards safer, more lucrative options in the US.
Profit-Booking and Future Prospects
Shah mentioned that the current $800 billion investment by FIIs in India is highly profitable, which creates a natural inclination for profit-booking. This could lead to further withdrawals from the Indian market as investors seek to capitalize on their gains. However, Shah remains optimistic about India’s long-term prospects, suggesting that a robust focus on GDP growth, corporate earnings, and governance could help retain and attract foreign investment.
Important Details & Evidence
- Chinese Market Underperformance: Over 30% of the emerging market weight is attributed to China, which has seen a lack of meaningful returns over the last 17 years, raising doubts about the entire asset class.
- Comparative Returns: The performance of Indian markets in dollar terms has been on par with US markets over the past five years, indicating resilience and potential for future growth.
Final Takeaways
Nilesh Shah’s insights underline a pivotal moment for India in the context of global investment dynamics. While the withdrawal of FIIs poses challenges, it also presents an opportunity for India to strengthen its economic fundamentals. By focusing on improving GDP growth, enhancing corporate earnings, and maintaining high governance standards, India could differentiate itself and potentially attract back global investors looking for robust opportunities in emerging markets. The future of India’s market appeal hinges on its ability to showcase its strengths amidst a changing global investment landscape.
