Foreign Investment Flows Wane: Understanding the Decline

The Real Reason Behind Foreign Investors' Exodus from India

A recent conversation with a renowned macro investor at a South Mumbai hotel got Bertie, a Mumbai-based fund manager, thinking about the true reasons behind the exodus of foreign investors (FIIs) from India. According to the investor, stocks and countries that benefited from the artificial intelligence (AI) boom were hoovering up all the capital flows, with India being a notable exception due to its lack of listed AI companies. However, Bertie suspected that this explanation was not the whole truth.

A closer look at the data revealed that FIIs had withdrawn almost $20 billion from India in the first four months of the year. However, a similar trend was observed in other Asian markets, particularly Korea and Taiwan, where FIIs had withdrawn significantly more money. This contradicts the theory that FIIs were only buying AI winners.

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When analyzing the data, Bertie found that India started levying capital gains on FIIs in 2018, with little change since then. However, complaints about onerous taxation were only recently raised. This led Bertie to speculate that FIIs might be weighing relative growth and valuations of different equity markets, considering not just the next 12 months' earnings but also sustainable numbers.

Moreover, the current benchmark may be forcing FIIs to invest heavily in the United States, limiting their ability to diversify their portfolios. Similar to a batsman's poor run, the entire blame for the recent poor performance of Indian equities cannot be laid on a single factor. Instead, it is likely the result of a combination of factors, including market valuations and benchmark constraints.

Bertie's analysis suggests that the FIIs' exodus from India may not be as straightforward as initially thought. A more nuanced understanding of the underlying factors is necessary to develop effective solutions to attract foreign investment back to the Indian market.