Surge in capital flows but not FDI and return to the old format...
This Week In Data #27
In this edition of This Week In Data we cover:
Surge in portfolio flows
Increase in overseas commercial borrowings
Rise in FX reserves
Decline in FDI
Global inflation
“I don't like changes. Mujhe Parivartan Pasand Nahin” so thundered Amitabh Bachchan to Shahrukh Khan in that iconic movie Mohabbatein. And in that same spirit, the readers of this newsletter have spoken loudly that they did not like the revised newsletter format of last week. So, we are reverting to the old format. And in case you have forgotten the movie Mohabbatein, we give you another iconic dialogue from that movie. And with that, let us get back to our newsletter.
This past week has been fairly data-light, both domestically as well as globally. But what is standing out in recent days and weeks is the surge of capital flowing into India. And in some cases, a lack of surge. So that is the central theme of this week’s newsletter.
The quantum of FPI money flowing into India currently is quite unprecedented. Based on the provisional data from NSDL, July is likely to be the third consecutive month of over US$5bn of net inflows – it has already seen over US$5bn of inflows and at current trends, full month inflows will be easily above US$6 or even US$7bn. This will mean that over the past three months inflows would be over US$18bn. This will be the highest inflow over 3 months since the three months ending January 2021 and the second-highest 3 month period since late 2010.
And it is not just portfolio investments that have seen a surge. External borrowings have also seen a big uptick in the last 3 months. The RBI has approved a total of US$16bn worth of external borrowings (ECBs, FCCBs) in the last three months. This is the highest since mid-2020. What is surprising is that this quantum of external borrowings is happening with the differential between the domestic and global interest rates being very narrow.
Sectorally, it is primarily the Manufacturing, NBFCs, Telecom and Refining sectors which are currently accessing the external borrowings – these 4 sectors total over 80% of the external borrowings in the last 3 months. One would hope there are either natural and/or financial hedges in place!
Consequently, FX reserves have also increased crossing US$600bn as of 14th July. Indeed, just that week saw almost US$13bn of increase in FX reserves. In just the last 4 months reserves have increased by US$50bn.
That said, FX Reserves are still below the all-time high reached in October 2021 (US$642 bn vs US$609bn currently). However, FX reserves now cover over 10 months of merchandise imports and close to 100% of external debt and thus are at a fairly comfortable level. This surge in capital flows has thus significantly bolstered India’s external balance sheet making it more or less all-weatherproof.
Even amidst this euphoria, FDI remains the one disconcerting trend. While FPI flows are surging and there is a general euphoria surrounding the India growth story and equity markets are at an all-time high, FDI is going the other way around as the chart below shows. May was the 5th consecutive month of decline in FDI. In the last 10 months, FDI has seen YoY growth in just 1 month (December-2022) and a modest 4% at that. Over the past 12 months, India has received gross FDI of US$66bn down almost 30% from its peak (12-month ended June 2021).
And even as this has happened, the repatriation of existing FDI has increased. In the last 12 months, it has totalled US$30bn. Consequently, net FDI received by India during the last 12 months is the lowest since the 12 months ending August 2018 – almost 5 years back!
Prima facie it appears that a fair part of this decline is probably attributable to the slowdown in startup investments – especially in the larger ticket sizes. This is both a slowdown in new investments as well as an increase in exits, especially some large listings that have happened in the last couple of years. Worth noting is that any foreign investment in an unlisted entity above 10% is considered FDI.
Globally, the UK and Japan had their CPI releases this week. UK's CPI declined sharply from 8.7% in May to 7.9% in June to the lowest since April last year. However, it remains significantly above the Bank of England's target of 2%. Fuel prices marked the largest decline over the previous month.
And Japan saw its inflation tick up 10bps to 3.3% in June. This will be the 15th consecutive month that CPI has remained above the Bank of Japan’s target of 2%. It is quite ironic that a country (Japan) that has long struggled to get any inflation into its economy and was the first to experiment with QE is now seeing sustained inflation even as the rest of the world seems to have been past the peak of the inflation cycle.
So that’s it for this week. The Bank of Japan meets next week on Friday. It is the only major central bank to have not hiked rates this cycle – its policy rate remains at 0.3% implying significantly negative real rates in the economy. The Fed also meets next week and a 25bps rate hike looks likely to take the upper end of the Fed Funds target rate to 5.5% (just 100bps below the repo rate!).