Key Points
- Foreign investors sold $2.7 billion of Indian equities in September
- Year-to-date outflows rise to $26.75 billion
- Brent crude above $100 a barrel has raised concerns over India’s import bill, inflation, rupee and current-account position
- Higher global bond yields and tighter monetary conditions, alternatives to Indian assets
ISLAMABAD: India faced renewed pressure on foreign investment as oil prices surge, a weaker rupee and elevated global bond yields threaten to reverse some of the gains that had encouraged international investors to return to its markets earlier this year.
Foreign investors sold IRs 99.8 billion ($1.04 billion) of Indian equities on Tuesday alone, taking September’s outflows to about $2.7 billion and the year’s total withdrawal to $26.75 billion, according to market data.
Indian shares were little changed on Wednesday after a two-day sell-off, with continued foreign selling and higher oil prices limiting market gains.
The reversal has been particularly sharp because foreign investors earlier started returning to India after when oil prices eased and pressure on the rupee receded.
Reports in July suggested that global fund managers were reassessing their retreat from Indian equities after crude prices fell back toward pre-war levels. The development coincided with measures to stabilise the rupee.
However, the latest oil shock has changed that calculation. Brent crude rose above $107 a barrel on September 29 as concerns over Middle Eastern supply disruptions intensified.
The Indian rupee consequently fell through the psychologically important 96-per-dollar level on Tuesday, touching 96.1450 before recovering after intervention by the Reserve Bank of India (RBI), the country’s central bank.
For international investors, the problem is therefore not limited to equities. Higher oil prices can weaken the currency, increase the cost of imported goods and reduce the attractiveness of local assets when measured in dollars.
Global yields add to pressure
Oil is only one part of the capital-flow equation. Global investors are also dealing with sharply higher government bond yields.
US 10-year Treasury yields approached their highest level since 2007 in September, while the dollar gained about 2 per cent during the month. Higher developed-market yields can make emerging-market assets relatively less attractive, particularly when investors also face currency risk.
Shrikant Chouhan, head of equity research at Kotak Securities, said high crude prices and global monetary tightening were likely to restrict foreign institutional investor flows into emerging markets over the next two to three months.
This makes India’s current situation different from a simple loss of confidence in its economic growth story. Foreign investors are weighing the local assets against a changing global opportunity set.
Structural concerns
Some analysts argue that India’s foreign-investment challenge predates the latest oil shock.
A recent Bernstein assessment cited by the Financial Express said foreign institutional investors had withdrawn about $40 billion from Indian equities over the previous two years.
The report also identified rupee weakness and relatively high valuations as factors affecting foreign investment decisions.
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That view places the current oil-driven outflow in a broader context. Higher crude prices may have accelerated the selling. However, foreign investors also consider earnings growth, valuations, currency performance, market access and the availability of globally competitive companies when deciding where to deploy capital.
India therefore faces a mixed investment picture. Short-term foreign portfolio flows are under pressure from oil, the rupee and global yields. Still, longer-term investors continue to view the country’s large domestic market and growth prospects as significant opportunities.
The immediate test is whether the oil shock persists. If crude prices remain elevated, the country’s import bill, currency and inflation could face continuing pressure, potentially keeping foreign investors cautious.
The latest episode therefore underlines a central vulnerability in New Delhi’s investment story: strong domestic growth and a large internal investor base can provide substantial support, but global capital remains highly sensitive to the price of imported energy, currency movements and returns available elsewhere.
