China’s Stimulus Package Exposes the Volatile Nature of India's FPI Scenario

For India, October 2024 saw an unprecedented withdrawal of FPI, to the tune of approximately Rs 85,790 crore.

Xi Jinping. 

(Photo: PTI)

An interesting chain of events affected India’s bullishly growing equity markets and adversely impacted the strong buffer of foreign currency reserves the economy was accumulating otherwise through robust FPI activity.

China's recent stimulus package, designed to reinvigorate China’s economy in the wake of pandemic-related slowdowns, not only influenced global financial markets (particularly India) but also impacted China’s long-standing global policy of “China Plus One.” This strategy, encouraged by governments and businesses worldwide to reduce reliance on China and diversify supply chains, has been a crucial point of focus for emerging markets like India, Vietnam, and Indonesia.

However, the new stimulus package—coupled with Chinese economic reforms—may shift this balance, recalibrating investment flows and competitive dynamics across Asia.

For India, October 2024 saw an unprecedented withdrawal of foreign portfolio investments (FPI) to the tune of approximately Rs 85,790 crore ($10.2 billion), a move heavily influenced by China’s newly appealing stock market valuations, liquidity boosts, and lower borrowing rates.

As FPIs redirected their capital to China’s reinvigorated economy, the ramifications of this shift began to ripple through the Indian economy, creating both immediate impacts and longer-term challenges.

FPI Realignment

China’s latest economic stimulus targets several critical areas, including interest rate reductions, mortgage rate cuts for homeowners, and relaxed reserve requirements for banks, effectively freeing up nearly 1 trillion RMB in liquidity. This package, while not as large as the 4 trillion RMB measure in 2008, signals a clear focus on economic stabilisation and growth that appeals to foreign investors.

Indian equities, which had been on a high-performance streak earlier in the year, became less appealing in comparison due to their elevated valuations, especially considering global economic shifts such as rising US bond yields, high inflation, and a strengthened dollar.

The FPI realignment not only introduced heightened volatility into Indian equity markets but also placed pressure on the rupee, compounding inflationary concerns as the currency’s depreciation increased import costs, particularly for energy.

The “China Plus One” policy has shaped global supply chains in recent years. This strategy, implemented by global companies and encouraged by governments wary of over-reliance on China, has been a lifeline for countries like India, which have sought to position themselves as alternative manufacturing and investment destinations.

The stimulus package, however, may alter the trajectory of “China Plus One,” particularly if it successfully revitalises sectors where China competes directly with emerging markets. China’s ability to attract FPI, reinvest in its technology and manufacturing sectors, and stabilise its economic base could entice multinational corporations to reevaluate the pace or scale of their diversification efforts.

If Chinese assets continue to offer favourable returns and stability, companies may delay or reduce planned investments in alternate markets, potentially stalling India’s ambitions to capture a larger share of global manufacturing.

The effects of this FPI shift have already manifested in the Indian stock market, with the NSE’s Nifty index experiencing an approximate eight percent decline in October. The volatility and downturn have raised concerns over sustaining foreign interest in India’s equity market, where FPI inflows have been pivotal in driving growth and liquidity.

For a country reliant on imports for critical resources, including energy, this can lead to broader economic strain, reducing consumer purchasing power and possibly dampening domestic demand. The exchange rate fluctuations, meanwhile, heighten financial pressure on Indian companies with foreign debt, as servicing these obligations becomes costlier. In the longer run, such currency volatility can dampen foreign investor confidence, limiting fresh capital inflows unless corrective measures are enacted.

China’s stimulus also sends a message about its commitment to domestic stability, a signal that may influence its competitiveness within the “China Plus One” framework. For India, which has pursued supply chain diversification policies to attract global manufacturers, this shift poses both risks and opportunities.

While a stronger Chinese economy could renew investor interest in China, leading companies to reconsider or delay diversification to India, it also creates a strategic moment for India to strengthen its competitive advantages. India’s ability to attract investments will increasingly depend on its capacity to maintain economic stability, offer competitive infrastructure, and ensure policy predictability.

By focusing on these areas, India can enhance its appeal as an alternative destination within the “China Plus One” framework, capturing those industries that seek to diversify for reasons beyond immediate cost considerations, such as geopolitical stability and reduced exposure to single-market disruptions.

For emerging markets vying to benefit from the “China Plus One” strategy, China’s stimulus could have mixed impacts, as businesses weigh the short-term advantages of investing in a stabilised Chinese market against the long-term rationale for diversified supply chains.

While capital flow into Chinese markets may slow down the shift to alternate destinations, companies focused on de-risking supply chains are unlikely to abandon diversification plans altogether. However, should China’s economy successfully stabilise and continue to attract FPI, the diversification drive could lose some momentum, potentially affecting emerging markets dependent on foreign investment inflows and supply chain relocation.

The Way Forward for India

In response, India’s policymakers may consider proactive measures to counterbalance the influence of China’s stimulus on global supply chain diversification. This may include offering tax incentives, simplifying regulatory requirements, and investing heavily in infrastructure to bolster its manufacturing appeal.

Additionally, strengthening the domestic investor base can help mitigate the volatility caused by external FPI movements, ensuring a more resilient financial market that can withstand global capital shifts. The focus should also remain on nurturing key industries, such as technology and green energy, which align with India’s growth vision and contribute to sustainable, long-term economic resilience.

Ultimately, China’s stimulus package has generated a dual impact: while rejuvenating its own economy and attracting foreign investment, it has also introduced new challenges for countries like India, which are working to position themselves as alternatives within the “China Plus One” policy.

India’s path forward will depend on its ability to adapt to these evolving global dynamics, strengthening its domestic economy and competitive positioning to remain a viable choice for companies seeking to diversify.

In the short term, however, India faces challenges from reduced FPI inflows, market volatility, and currency pressure, but strategic policy actions and a sustained commitment to improving its investment landscape could allow India to benefit from the global push for supply chain diversification, even as China works to stabilise its own economy.

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. Aryan Gopalakrishnan is a Research Analyst with CNES and graduated from Jindal School of Government and Public Policy. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)