India continues to be favourite emerging market: Aashish Mishra

Large foreign outflows since December are on global developments, particularly in US market: Mishra

Large foreign outflows since December are on global developments, particularly in the US market, says Aashish Mishra, head of securities services, Citi India. Mishra tells Samie Modak there were a lot of regulatory changes in 2016 affecting foreign investors, and the impact is playing out now. Edited excerpts:

The debt and equity markets saw outflows of $11 billion in the December quarter. What are the key reasons for this?

The selloff last quarter, especially after November, has been a function of global developments and the resulting change in the view towards emerging markets (EM) as a whole. India, being part of it, gets impacted by the overall EM view. What is largely driving the change in the EM view are the developments in the US, including the rate hike by the US Federal Reserve, the dollar strengthening, rallies in the stock markets and policy expectations from the new administration. 

Have domestic factors like demonetisation also impacted foreign flows?

It’s important to look at the domestic factors in entirety since there have been quite a few domestic developments in 2016 impacting foreign flows, demonetisation being just one of them. The year saw some good reform initiatives, primary issuances hit a record high and for the domestic asset management industry it was a good year. All of these are good factors from an investment flow standpoint. India continues to retain its spot as the favourite EM destination and this has continued right through the year. As regards demonetisation, the impact is playing out and we will get a more precise view once earnings announcements are made. In the short term, the transition presents challenges, and GDP growth and the earnings in certain sectors could be impacted as a result. However, investors also look at the long-term impact, which is expected to be positive with higher tax earnings and compliance, increased lending capacity, advantages of a digital economy and higher financial savings. 

When do you expect the foreign outflows to stem?

A lot will depend on global developments. As and when the EM outlook changes, India should be a beneficiary of that. Besides this, investors will also keep an eye on local triggers such as the Union Budget, GST rollout and political developments. Also, corporate earnings, pace of reforms and market simplifications measures will impact flows.

It will be interesting to note that equity allocation growth in Indian mutual funds and pension funds could offset some of the foreign flows. The growth trajectory of the Indian asset management industry that began in early 2015 is likely to continue, given good product performance, demographics, wealth accumulation, digitisation, etc.

The year 2016 saw a lot of regulatory changes impacting FPIs. How are all of them playing out?

The year has been an active one from the standpoint of regulatory changes, with measures that have had a positive impact and areas that need clarity. India continued with its strong focus on structural reforms, with key announcements and implementation like the GST. In the market access rules for the securities space, the industry has adopted the new Foreign Portfolio Investors (FPI) regime introduced two years ago, making it easier to convert investor interest into actual flows. Sebi has made changes in regulations for offshore derivative instruments (ODIs), or participatory notes (P-notes). This has impacted parts of ODI flows, and led to investors exploring the direct FPI route. 

In taxation, the tax treaty revisions with Mauritius and Singapore have been the key landmarks. While the revisions increase the cost for a section of investors, they bring increased clarity and certainty for investors from these regions, which has been welcomed. On the GAAR norms, which kick in from April, investors are expecting more clarity. On the more recent clarification on indirect transfers applying to FPIs, they have highlighted certain challenges and additional queries that may need to be clarified to determine the final impact. 

In the fixed-income space, the increase in investment limits, online access to FPIs and launch of masala bonds have been favourable positive moves. 

P-notes is an area where there has been a significant tightening. Do you expect further shrinkage in investment coming through this route?

The P-notes space has seen changes with Sebi strengthening the regulations and KYC requirements, aligning them with those for FPI. The tax treaty changes would now also lead to passing the onshore taxation to P-note investors from April. Both of these have an impact on P-note flows. The regulatory changes significantly strengthen the product framework and address key concerns, though P-notes shrinking drastically may not be a healthy thing because they are an important capital market product providing India access to global investors and liquidity to Indian markets.  

What are the key things that investors are eyeing in the Budget?

Investors will keenly watch areas like the fiscal deficit, tax measures and key reform announcements. There will also focus on specific measures to support economic growth (and offset impact of demonetisation), public investments, job creation and sector-specific measures.