Breaking Views | Why FIIs Are in ‘Exit India’ Mode

Sanjay Pugalia explains why India no longer attracting investment from FIIs.

Why are FIIs withdrawing their money from India?

(Photo: The Quint)

You must have heard that India was a safe investment area even during the 2008 global financial crisis, making the country attractive to investors. Cut to 2018 and we’re no longer inviting investment. A few months ago we told you about the ‘dollar millionaires’ and their ‘Quit India’ movement. Now, we have an ‘Exit India’ movement taking shape, led by FIIs.

The amount of money that has left the country in the first five months of 2018 is actually much more than the amount of money withdrawn by foreign investors during the global financial crisis in 2008. The amount withdrawn in 2018 from Jan to May amounts to approximately Rs 32,000 crore.

So, What Are the Reasons Behind EXIT INDIA?

1. The increasing price of crude oil is likely to weaken an already struggling Indian Rupee. This makes Indian markets less lucrative for foreign investors.
2. A good monsoon amounts to a pressure on the government to raise the minimum support price and procure more. This will inevitably prompt the government to borrow more, putting pressure on liquidity.
3. This is an election year and the chances of NDA coming back to power isn’t very strong. A coalition government seems more likely, which is a cause of worry for investors, considering the risk of political instability or uncertainty.
4. With increasing interest rates in the US, investors feel safer at home.

These are the reasons why FIIs are withdrawing their money from India.

These factors have contributed to investors’ uncertainty and hence, they are withdrawing their money and leaving. If they were assured of the signals that the govt would maintain the fiscal discipline and RBI would work on a monetary policy that ensures liquidity in Indian market then the investors wouldn’t be leaving India.

About Rs 29,000 crore out of Rs 32,000 crore was withdrawn from the debt market this year, whereas earlier, the outflow was from equity market.

Money raised through debt funds is used by the government for long term development plans, where the government borrows money and pays a fixed interest. This is called a bond yield, and this yield is getting stronger. The base repo rate of RBI stands at 6-6.25% and this increasing gap makes the foreign investors uncomfortable. They are not confident about this.

The RBI hasn’t provided any clarity about its growth. There will be a likely rise in inflation which would cause a further increase in interest rates.

To add to this, the bad condition of government banks is one of the major concerns. State development plans is a big issue with banks. They will also have to keep their money out which cannot be used for transactions in the debt market.

FIIs see no positive signs of economic stability, growth and easing of banking interest. These wary investors feel that returns on their investment won't be promising and that they’d rather invest in an attractive market, propelling EXIT INDIA.