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Why India could attract more foreign investment

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It is all in the macros. A decade ago, India faced problems with twin deficits: a high current account deficit and a high fiscal deficit. The present state of these two deficits is a significant turnaround from the situation ten years ago.

When foreign investors put their money into a market, they look for price stability first. Foreign portfolio investors have been net buyers in the equity market over the past few days. The rally to a record high for the NSE Nifty and S&P BSE Sensex is primarily driven by the money put in by these investors. But even better is their interest in India’s debt markets. According to a media report, they are net buyers for the first time in four years.

For reasons for this buying surge by foreigners in Indian stocks and bonds, you should look at the trend in the 10-year G-Sec yields. There is relative stability as consumer price inflation remains under control. There are also indications of a renewed push by India to enhance the sovereign credit rating. Those happen when India’s macros tend to improve. The twin deficits are narrowing as export revenue grows and direct and indirect taxes stay robust. There is momentum in the Indian market as the demand for Indian debt rises.

In the case of equity markets, there is good news on the consumption side of the economy. According to an analysis by India Ratings, a unit of global ratings agency FITCH, real wages have a positive turn as inflation stays benign. The personal consumption demand is likely to boost after a sluggish few quarters as the lower income strata in the rural and urban areas see higher wages. Consumption is a crucial driver of India’s economy. That is good news for companies dependent on India’s consumption story.

In a world fraught with high inflation, geo-political tension, slow growth and supply chain disruptions, investors seek a market that offers price stability and faster growth. They can make money only when businesses in these economies do well. The renewed foreign portfolio investment interest in India’s equity and debt markets indicates confidence in India’s prospects. Exchange rate volatility is an essential factor that comes into play as foreign flows increase. When FPIs invest, markets rally. However, there are times when there is a panic selloff at the hint of rising inflation in the rich world. The Reserve Bank of India has intervened actively to stem volatility in the foreign exchange market. A new paper by the Reserve Bank of India says that while equity flows increase exchange rate volatility, bond flows reduce it. An increase in debt market flows after four years is good news. If India’s bonds make it to the global bond market index soon, it will lead to more bond market inflows and further easing pressure on the interest rates.

While the economic growth in the year ahead is likely to slow, India will remain one of the top economies. You must identify the right basket of stocks to make a well-diversified portfolio.


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