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Foreign investors have started returning to the India’s equity markets, as the deadly second wave has subsided in the country.
In the month of August so far, foreign institutional investors (FIIs) have been net buyers at the country’s bourses for the first time in this Indian financial year – which starts from April and ends in March. Foreign funds have bought shares worth INR28.9 billion (US$389.21 million) in the country which is slated to be world’s fastest growing economy this year, albeit with a low and favourable base.
Till now, foreign funds have been net sellers in Indian markets for four months on the trot – withdrawing a net of INR412.7 billion (US$5.6 billion) from the country’s equities.
In fact, in the month of July 2021, foreign funds put up their worst show in the country’s equity markets since March 2020 – the month when global markets went crashing down due to COVID-19. During the last month, foreign investors pulled out INR231.9 billion (US$3.1 billion) from the Indian markets.
Experts say that the turnaround seen in Indian markets during August is primarily because India is way past the peak of the deadly second wave of the pandemic.
Foreign investors, who, as per estimates, control one-third of Indian equity markets, mostly park their money in the blue-chip, large-cap companies which are part of the BSE Sensex index. These funds play a significant role in determining the trend in the India’s premier benchmark.
The impact of foreign investors is so huge, that the country’s government had to partially withdraw a controversial legislation two years back.
In the 2019 budget, India’s Finance Minister Nirmala Sitharaman significantly hiked the surcharge rates, which continue to stand at 15% (for income between INR10 to INR20 million); 25% (for income between INR20 million to INR50 million) and 37% if the income is above INR50 million. This would mean that if you earn more that 50 million rupees in India, you will have an effective income tax rate of almost 45% now.
In India, most foreign funds are registered as Association of Persons – a category that also came under the purview of this new tax regime. As a result of this, foreign funds started dumping shares worth a net of INR383.2 billion (US$5.2 billion) over next three months. Seeing the country’s equity market crumble under foreign sell-off, the government partially tweaked the taxation norm – exempting domestic institutional investors and foreign institutional investors from exorbitant surcharges.
