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The Hindu Business Line: What worries foreign investors?
August 16, 2013
By Manisha Jha

With the rupee breaching the 62-mark in intra-day trade before ending the day at its all-time low of 61.66, foreign institutional investors (FIIs) were left spooked.

Facing a decline in the net worth of their investment despite the RBI’s liquidity tightening measures, their mood is cautious and watchful.

More and more foreign banks are turning pessimistic and downgrading India.

Goldman Sachs, Morgan Stanley and Nomura are some recent examples which have either downgraded India or lowered the benchmark targets. However, some global investment banks such as Credit Suisse are still hopeful of a turnaround.

RECOVERY “ELUSIVE”

In its report dated July 31, Goldman Sachs downgraded India to “underweight” on the back of “elusive recovery and rising macro vulnerabilities”.

“Against a backdrop of lower growth, tighter liquidity and rising macro vulnerabilities we downgrade India to underweight. The investment case for India has turned less favourable. Growth recovery looks elusive, macro vulnerabilities are rising and positioning remains extended. We see further earnings cuts and limited room for re-rating,” the report said.

The investment bank also lowered its Nifty 12-month target to 6,200 with potential downside risk from a weaker rupee for US-based investors.

ACHILLES’ HEEL

A high current account deficit was noted as the key vulnerability for India, having risen from 1 per cent of GDP in FY07 to 4.8 in FY13 and expected to continue facing pressures, said the report.

According to Richard Iley, Chief Asia Economist, BNP Paribas, while FII debt flows have been a key driver of capital flow volatility this year, portfolio flows are dominated by equities which typically account for some 80 per cent of portfolio inflows.

ELECTION FEARS

“Even after the outflows seen since late May, a cumulative net $12.6 billion has flowed into Indian equities this year, presumably chasing India’s long-run growth prospects. If growth prospects continue to sour and with it prospective equity market returns, these inflows are presumably at risk, potentially risking a further leg down in the INR,” he added.

Another risk factor from an FII point of view is the political risk of markets getting worried about a policy paralysis ahead of elections.

However, decisive signs of pick-up in investment cycle, currency stabilisation and stable government after elections will boost business confidence and potentially bode well for Indian equities, said Goldman Sachs.

Subscribing to take a more patient view of the situation despite cutting its average GDP growth forecast for India to six per cent from 6.5 per cent, Credit Suisse in its report titled “India: Recovery Cancelled?”, said: “We believe the fundamentals are clearly more supportive of activity in 2013/14 than they were in 2012/13, suggesting economic growth should also be meaningfully stronger.”

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