FIIs skeptical India growth story will remain intact

Finance Minister Pranab Mukherjee tried his best to project an optimistic picture of the economy, but foreign institutional investors were not quite convinced about the India growth story.

Fund managers who interacted with the finance minister today said the government had standard replies to concerns on inflation, deficits, growth and governance. In the interaction moderated by ICICI Bank CEO Chanda Kochhar, Mukherjee urged FIIs to “take a long-term view of the economy”.

In the meeting with more than 30 leading Indian and foreign institutional investors, the finance minister said inflation “is likely to moderate in the months ahead especially as the monsoons are expected to be normal strengthening the economic prosperity of the farmers.”

Adviser to finance minister, Omita Paul, finance and revenue secretary Sunil Mitra, disinvestment and expenditure secretary Sumit Bose and chief economic advisor Kaushik Basu represented the government at the meeting, while officials of Morgan Stanley, Franklin Templeton, Sundaram Mutual Fund, Birla Sun Life insurance, ICICI Securities, among others, represented the private sector.

Stock market analysts say that despite negative market sentiments after several scams and political situation in the country, FII sentiment was strong about the India growth story. However, headline inflation, which has been above 8 per cent since last year, growing interest rates and as a consequence, moderating growth has had a negative impact on the overall FII flows. In the current calendar year, according to experts, almost $750 million has been the net outflow so far.

FIIs have invested over $3.2 billion in the Indian markets, majority of which is in debt instruments.

“Inflation is the most worrying part for the FIIs. Major talking point among FIIs right now is slowing growth in the country, the only factor which was working in attracting FIIs to India,” Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities said.

Elaborating on economic indicators, the finance minister expressed confidence that the Centre would be successful in reining in fiscal deficit to the targeted 4.6 per cent in the current financial year. “The provisional figures for 2010-11 have given us strong reason to be hopeful in this regard,” he said. Earlier, government officials had indicated that there might be a shortfall in revenue collection due to high refunds this year — expected to be around Rs 1 lakh. The finance minister, however, maintained that the revenue collection “is not likely to see any decline”.

In fact, even if the need arises for additional fuel subsidy, “funds would be committed with least impact on the fiscal deficit,” Mukherjee said. He said the economic growth of the country in 2011-12 could be around 8.5 per cent and the investors should take a long-term view of the economy instead of getting swayed by the short-term statistics. The government has also started working on financial sector reforms including widening and deepening of the Indian securities markets, he said.

Source: http://www.indianexpress.com/news/fiis-skeptical-india-growth-story-will-remain-intact/800702/2

Indian economy needs some capacity unlocking

The Indian equities market operated within a broad range in May 2011. The key benchmark indices, SENSEX and Nifty posted a month-on-month performance of -3.31% and -3.29% respectively. The sentiment in the market dampened on account of various factors: namely, the rising credit risk perception in the PIIGS nations (especially Greece); the deterioration in the asset quality of the PSU banks; and the net withdrawal of $1.48 billion by the FIIs from the equity market. However, it may be the un-intentioned slowdown in the domestic economy that is being considered as a more troubling development. The inflation in the fuel segment has necessitated a partial pass-through to the general consumers, adding further spurt to the already elevated price levels in the economy. In turn, this has called for a far more stringent interest rate regime by the RBI, who have consequently raised the cost of capital (and thus of the investment) in the economy. The resultant contraction in the aggregate demand is expected to moderate the economic growth for FY12. The GDP growth for Q4-FY11 has already tempered down to 7.8%. The IIP growth also seems to be signalling towards a slowdown, with the average IIP growth for FY11 estimated at 7.2% over the last year. Resultantly, the revised growth projection for FY12 is in the vicinity of 8-8.5% from the earlier expectation of 9-9.5% for the same period. It is therefore believed that the RBI may adopt a more flexible policy option were the inflation numbers to moderate post-monsoon. Therefore, it is essential here that a coordinated policy action be effected to cushion the economic growth while addressing high-inflation. A potential policy of strengthen the rupee in the near-term can be of vital consequence in this regard. This may reduce the landed cost of petroleum imports and thus help cushion growth. Additionally, a targeted delivery of the fuel subsidy to the goods transportation industry is needed. This may constrain the fuel price pass-through from spilling-over into the general economy. The debt market continues to be wary; with the market liquidity tightening further over the month. The 10-year gilt was hovering at a 26-month-high before moderating down to some extent, in the process driving up the commensurate 10-year corporate bond at 9.70% levels. With inflation continuing to remain stubbornly persistent, we can expect the gilt yields to remain at current levels, inducing the corporate sector to increasingly resort to overseas debt to meet their capital requirements. Going forward, it remains to be seen how regulatory policies surrounding issues like land acquisition, environment, fuel availability, and transparent governance, are formulated. Indian economy has displayed a tendency of overheating as it approaches the 9% GDP growth mark. This is indicative of supply constraints within the economy that are unable to withstand the high demand pressures. Therefore, if India is to attain an inclusive and sustainable double-digit growth trajectory, the capacity unlocking within the economy would be necessary. To achieve this, the liberalisation of policy on some of the above stated issues would be critical.

Source: http://www.moneyguruindia.com/article.php?cid=1330&id=11&sid=27