FPIs are already shifting focus to emerging markets. India is a favourite destination.
Foreign portfolio investments into India are trickling in. Will the trickle turn into a deluge? I see this happening, though gradually. Early signs indicate the Indian financial system will be flooded with liquidity in the coming months. Here are the reasons why:
Cheaper crude, appreciating rupee and lower bond yields
The double dhamaka of 20% cheaper fuel and 5% appreciation in rupee, changes the macro variable of current account deficit. In absolute terms, this could mean a 5 billion dollar gain. That’s Rs 35,000 crore in rupee terms.
FIIs investing in bonds
As dollar comes into India through bond purchases, the RBI is likely to buy dollars and release rupee into the system. Interest rates get cheaper. Bond yields at 7.6% are already down by 50-60 basis points.
Political and election pressure
Money has to be kept cheap during election season. RBI is under pressure to ensure that there is enough money in the system. Inflation is low, so RBI will not hike rates. More importantly, RBI can please the bosses in Delhi by pumping in more money into the system. A CRR cut is easier than paying a higher dividend to the government. A CRR cut of 1 per cent could release about one lakh crore into the system.
A dovish Fed
Adding to the macro magic is the dovish statement coming from the Fed Chairman. This simply means interest rates in the US will be capped soon.
So, this asset class will not be attractive. The dollar has almost peaked. The US bull run is coming to an end. Great recipe working in favour of emerging markets. FPIs are already shifting focus to emerging markets. India is a favourite destination. So far, India has received about 1.5 billion dollars, the highest among all Asian countries. Be prepared for a deluge. Rework your strategies!