India sees more than USD 11.4bn FPI flows since March 23

The recent revival of foreign portfolio investors FPI flows into emerging markets EMs, including India, is a reciprocal exchange to the dwarfing of global market risk premium CBOE VIX less than the post covid lows in anticipation of a Goldilocks scenario. The underlying presumption is that recession in the US AEs will be prevented by an automatic glide of current high inflation towards their respective inflation targets, thereby resulting in the resumption of QEs and rate cuts. Since Mar 23, India has seen a FII inflow of USD 11.4 bn since March 23. The FII has counterbalanced the decrease in mutual fund flows. In our experience, we know that predicting FPI flows has always been difficult. The actual composite flows during FY 21 - 23 have been just 16 bn (USD 14 bn) in equity or just 14% of what we predicted in 2020 given the underlying assumptions of continued gargantuan monetary policy easing globally. Quickest monetary policy reversal than anticipated: The compounding impact of fiscal expansion has led to the sticky inflation situation in the AEs, unlike the Post-GFC QE 1 - QE 3 2009 - 16 and zero interest rate policy ZIRP when inflation remained orderly in 95% of months saw inflation less than 2%. Compared to the counterfactual real GDP trajectory, the American lost only 50 bps. The currency 37 bn net inflows during FY 21 were followed by the outflows of USD 23.6 bn cumulative outflow during FY 22 - FY 23. For the sustained revival of FPI flows into India and EMs, we must assume the following conditions: A quick reversal of the elevated inflation situation globally back to sub 2%. After QE5, 6 and 7 the US Fed and other AE CBs rate back to ZIRP. Rebound in India's GDP growth to a sustainable 7 - 8% from the modest-yr CAGR. Most AE CBs indicate that the war against inflation is far from over. The BIS Annual Report notes that there is a material risk that inflation psychology will take hold, where wage and price increases begin to reinforce each other. M 2 GDP, down from the peak of 90 percent, is still significantly higher than the pre-covid levels at 69%, implying a surplus liquidity of about USD 2.5 tn. The current US real rate is significantly lower than the Fed's guideline of 1.5%. The rise of India is highly dependent on global trade performance, as most indicators show a marked slowdown in manufacturing and global trade volumes. For every 100 changes in global trade volume growth, India's real GDP growth is impacted by 178 bp, highlighting India's increased sensitivity to global trade. Despite the upside surprise in 4 QFY 24 real GDP growth in FY 23 at 6.1%, the private demand consumption and investments of households corporate is estimated to be growing at 2 - 3%. The economic outlook for the period is significantly optimistic compared to our assumption of sub 5%. Sharp deceleration in sales growth of non-finance companies to 7 - 8% in 4 QFY 23, from 50% in 1 QFY 23, along with a contraction in profits, is prompting cutbacks on raw material to conserve margins and narrowing working capital demand. The general assumption of private capex rebound, therefore, looks far-fetched. This is unsupportive of the rising earnings growth scenario. Our assessment shows that the post-covid bounties in the form of high commodity prices, exports rebound, and gains in market share by large companies translated into a substantial deviation in earnings of NIFTY 50 companies during FY 22 - 23 38% higher than the pre-covid trend, whereas those bounties have receded since mid-FY 23. The EPS projections for the Nifty 50 are at an untenable departure of 70%, nearly 10 x that of the S&P 500 at 7%. The post-pandemic peak in FY 21 was 1.4%, before decreasing to an average of 0.3% in FY 22 - FY 23. The sustenance of the recent recovery in FPI flows will require all aforesaid optimistic global conditions to materialize along with the realization of the extremely optimistic consensus earnings projections and GDP growth of 7 - 8%. A mild rebound is not exactly überraschend after two years of retrenchment. But given the worldwide and domestic macroeconomic and financial market realities listed above, it will be premature to extrapolate the recent revival into a cyclical rebound. These do not reflect the views of the Economic Times.