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End of Fed’s QE unlikely to affect India inflows

Foreign portfolio flows into the Indian equity and debt markets, which have crossed Rs 1.8-lakh crore so far in 2014, are expected to receive support from the European Central Bank (ECB).

For one, the ECB has cut the rate at which banks can borrow from the central bank to 0.05 per cent. It is also set to commence its own stimulus package from October, although the quantum of the same is yet to be announced.

On the other hand, the US Federal Reserve is set to end its monthly bond-buying programme in October. The trimming of the programme began in December 2013; it has come down from $ 85 billion a month to $ 25 billion.

“The US Fed’s stimulus ends by October-end, but now there will be another round of stimulus from the ECB, which will be equally important. Due to this, the global liquidity is expected to continue. This would lead to foreign flows coming to Indian markets. This is because India continues to be considered an attractive investment destination for investors,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

“There is a probability that investors would prefer to invest the surplus liquidity likely to be generated post the commencement (of the ECB action) in emerging market economies as opposed to the Euro region. In such an event, FII (foreign institutional investor) inflows into India among other (emerging market economies) will see an upswing,” said a CARE Ratings report released on Friday.

So far this year, FIIs have been net buyers by Rs 1.05 lakh crore in the bond market. They were net buyers by Rs 80,314 crore in the equity segment.

Although Reserve Bank of India (RBI) governor Raghuram Rajan assured the Street several times that the country is better prepared now to withstand the impact of the end of US Fed’s bond-buying programme, traders were concerned about the prospects of foreign flows turning negative. However, this has changed in light of the ECB announcement on Thursday, giving a reason for stock markets to cheer.

“The flows will keep continuing, but may be more in equities because on the debt side, FIIs limits are getting filled up,” said Navneet Munot, chief investment officer at SBI Mutual Fund.

FII flows in Indian markets had picked up earlier in 2014 due to the euphoria ahead of the elections. However, experts believe the incremental flows shall also depend on how the economic growth pans out.

“The investors’ perception is that compared with other emerging markets, we are doing better. But we cannot become complacent because of this. As we enter the second half of the fiscal (FY15), investors will expect a pickup in growth. So far, we are seeing all-round improvement, but partly it is contributed by favourable statistical data. Investors would want that sequentially also, the growth momentum picks up,” said Rupa Rege Nitsure, chief economist and general manager at Bank of Baroda.

Earlier, there were concerns in the currency market that once the US Fed’s bond-buying programme ends, the rupee might see some volatility as FIIs could pull out of India. However, now due to ECB’s stimulus, the expectation is that the rupee will continue to be stable.

According to Venkatesh of IDBI Bank, the broad trading range for the rupee will be between 59 and 61 a dollar.

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