FPI flows to remain under pressure despite tax surcharge reversal: Report

It expects "headwinds to foreign portfolio investment (FPI) flows into India to continue over the near-to-medium term despite the accommodative global monetary policy stance and the central government's efforts to alleviate uncertainty regarding the higher surcharge".

New Delhi:Foreign funds flow into India is expected to remain under pressure over the near-to-medium term despite the government rolling back tax surcharge on FPIs and benign global monetary policy stance, said India Ratings on Wednesday.

A gamut of factors, such as slower-than-expected demand growth in major economies, geopolitical and trade tensions and a gradual weakening of the economic growth prospects in India have contributed to a build-up of risk aversion, which has impeded the demand for emerging market debt instruments, according to India Ratings, a unit of global rating agency Fitch.

It expects "headwinds to foreign portfolio investment (FPI) flows into India to continue over the near-to-medium term despite the accommodative global monetary policy stance and the central government's efforts to alleviate uncertainty regarding the higher surcharge".

China would continue to crowd out capital flows to emerging markets like India and consequently, FPI inflows would remain under pressure, it added.

While India might occasionally experience pockets of inflows, India Ratings and Research noted that global capital inflows are unlikely to pick up sustainably.

Foreign investors pulled out over Rs 30,000 crore from the equities during July-August after Finance Minister Nirmala Sitharaman in her maiden Budget levied the tax surcharge on FPIs.

Ever since the surcharge was announced in July, foreign investors had been demanding rollback of the decision, and on August 23, the government withdrew the enhanced surcharge imposed on FPIs.

India Ratings believes that the shift in global monetary policy conditions to a relatively accommodative stance is unlikely to revive capital flows into emerging markets like India.

Despite the US Federal Reserve's decision to restrict the contraction of its balance sheet and the European Central Bank's (ECB) decision to conduct a fresh round of targeted long-term refinancing operations, India Ratings expects the cumulative liquidity infusion by four major central banks (US Fed, ECB, Bank of England and Bank of Japan) in 2019 to be significantly low.

It is expected to be around USD 186 billion in 2019, compared with the infusions of USD 353 billion and USD 1.45 trillion in 2018 and 2017, respectively.