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The rupee is likely to remain under pressure and foreign investor flows may not return to Indian markets in the near term unless global interest rates ease and geopolitical tensions subside, Akhil Mittal, Senior Fund ManagerFixed Income at Tata Asset Management, told ANI, attributing the trend to a broader shift in global capital flows towards the US.
Mittal said high interest rates in developed economies were encouraging investors to move money away from riskier markets such as India, making a sustained reversal of foreign outflows difficult without a change in global financial conditions. There has to be sanctity to interest rates and yields in the Western world. As long as globally, especially the developed world, they stay high, it is difficult to assume that there will be any near-term reversal of flows into risk assets like India, Mittal said. He identified a resolution of geopolitical tensions surrounding the Iran-US war and greater stability in interest rates and bond yields in Western economies as key conditions for a return of foreign capital. Mittal said the rupee's movement was being driven primarily by capital flows, with foreign investors pulling money out of India as high interest rates in developed economies made other markets more attractive. A change in the global interest rate outlook could help ease the pressure on the currency, but till such time, I think Rupee will remain under pressure, he added. He further said the inflows through Foreign Currency Non-Resident (FCNR) deposits could meet India's immediate dollar requirements but might not offset sustained outflows as long as global yields remained high and geopolitical tensions and crude oil concerns persisted. He expects the rupee's underlying direction to remain towards depreciation, although short-term recoveries and falls of 1-2 per cent could occur. However, he noted that the currency was close to fair valuation on a real effective exchange rate (REER) basis for the first time in nearly two decades, providing some fundamental support. Turning to equities, Mittal said Indian markets remained attractive over the medium to long term despite foreign investor selling. He said net foreign portfolio investor (FPI) equity flows had turned negative, a trend he described as not seen since 2015, but maintained that India's growth outlook remained intact. Policy stability, manageable inflation, manageable fiscal, they are all in place, he said, identifying crude oil prices and the rupee as the key macroeconomic challenges. He said long-term investors could continue to hold and add exposure to Indian markets, but cautioned that near-term volatility would persist, with sharp rises and falls likely rather than a sustained one-way rally. On information technology stocks, Mittal said the sector appeared relatively cheap and could offer a hedge against uncertainty surrounding artificial intelligence and AI investments, potentially attracting buyers as those concerns grow. "As long as the uncertainty around AI flows and AI investments keeps growing or keeps adding there, Indian IT does provide a natural hedge and hence, we'll see suitors and buyers," he said. (ANI)
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