The Hindu Business Line : `Indian markets will attract sustained flows': Franklin Templeton Mutual Fund

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`Indian markets will attract sustained flows': Franklin Templeton Mutual Fund

THE sustained FII flows indicate that the return expectations of global investors could be lower than those of domestic investors. On the other hand, recent economic data has been ahead of expectations due to a combination of increasing consumption and investment uptick led by corporate as well as infrastructure spending.

We continue to believe that Indian markets will attract flows on a sustained basis from a long-term perspective, given the strong economic fundamentals and growth potential. The FII base has been expanding in recent times in geographical terms as well as the type of investors.

We have seen increased interest from Japan and Taiwan and long-term investors such as pension funds have also been taking exposure to India. In that sense, we believe such inflows should be seen as a vote of confidence for India's potential rather than as a cause for concern.

One could view the increased FII flows as a better form of capital infusion compared to FDI, given that they promote Indian entrepreneurs and assets controlled by Indians who understand the local markets better.

Outlook: Over time, as more and more domestic investors increase their allocation to equities, we could see this trend change. Equity ownership among Indian households continues to be low.

This trend seems to be changing on the back of buoyancy in the stock market and declining returns from traditional savings avenues, combined with various tax reforms undertaken by the government. If the proposed pension reforms are implemented, it should give a further fillip to the domestic ownership over the long term.

That the market has had a run in the preceding month with consistent purchases by foreign investors is an understatement. In particular, banking stocks have rallied on the back of increased flows to exchange trading funds.

What the movement highlights is the lack of true free float available for investors, given that a lot of the stocks are at, or near, FII limits. And essentially implies a sort of get-in-before-the-door-closes attitude amongst investors as the domestic markets witness sustained portfolio inflows, reflecting India's growing prominence on the global scene — and abundance of liquidity.

In such circumstances, there could be increased use of innovative instruments to short circuit FII restrictions being placed on individual securities — which poses a regulatory dilemma — but at the same time ensures sufficient flow of liquidity.

The asset price inflation in both property and stock market — may make the regulators more prone to take a more conservative monetary stance. One move could be allowing capital to flow out through a phased relaxation of the capital account. This is likely to take place if the yuan appreciates enough or oil prices actually come down — affecting the trade balance positively.

The oil sector companies continue to subsidise the consumers with their profits — and thus stemming overall profit growth. The losses mean that the policy would again have to be reviewed. After all, there is a conjecture that the government is allowed to privatise loss-making companies, and no oil minister would like to be remembered as the one under whose regime the navratnas made losses.

(Edited extracts from the latest monthly report of Franklin Templeton Mutual Fund)

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