Why the Rich Investors and FIIs continue to sell the Indian Markets | Akshat Shrivastava

Summary

The Indian stock market has seen a correction of about 10-11%, with Foreign Institutional Investors (FIIs) pulling back due to factors like the depreciation of the Indian Rupee, higher taxes, and uncertain regulatory policies. Despite this, markets are cyclical, and there is hope for recovery once conditions stabilize. Investors must understand the impact of currency depreciation and taxes on returns and target a minimum return rate of 15% to preserve wealth. The future of the Indian economy depends on factors like global interest rates and private consumption, which may take a few years to materialize.

Takeaways

• 😀 FII (Foreign Institutional Investors) have been withdrawing money from the Indian market since mid-2023, with a focus on reallocating to other economies like China.
• 😀 The Indian Rupee (INR) has depreciated by 45% against the US Dollar since 2014, significantly impacting the real returns for foreign investors.
• 😀 Currency depreciation and inflation mean that foreign investors need to achieve a higher return on investments in India to preserve their wealth.
• 😀 Investors must understand their 'hurdle rate'—the minimum return required to offset currency depreciation, inflation, and taxes—when investing in India.
• 😀 Depreciation of INR erodes the buying power of money, making it harder to preserve wealth even with nominal market gains.
• 😀 Despite the challenges, market cycles suggest that FII money could return to India once economic conditions improve, especially when interest rates drop globally.
• 😀 The government’s capital expenditure has led to some market growth, but private consumption has yet to pick up as expected, leading to slower economic growth.
• 😀 Foreign investors are deterred by India’s uncertain taxation policies, particularly with taxes on long-term capital gains (LTCG) rising from 10% to 12.5%.
• 😀 To preserve wealth in the Indian market, investors need to target returns of at least 15% annually to offset the erosion caused by depreciation, inflation, and taxes.
• 😀 Inflation and currency depreciation work hand-in-hand, and the combination can have a greater impact than individual inflation rates alone, especially in a country with a high trade deficit like India.
• 😀 It is crucial for investors to stay informed about the broader macroeconomic environment, as market conditions, taxation policies, and currency trends can significantly affect long-term returns.

Q & A

Why are Foreign Institutional Investors (FIIs) withdrawing from the Indian market?

FIIs are withdrawing due to several factors. Key reasons include the depreciation of the Indian Rupee (INR), which erodes the returns for foreign investors when converting profits back to their home currencies. Additionally, taxation policies in India, including the rise in long-term capital gains tax (LTCG), create uncertainty, making the market less attractive. FIIs are also shifting their investments to other economies like China where they perceive better returns.

How does currency depreciation impact foreign investment in India?

Currency depreciation impacts foreign investment by reducing the value of returns for investors when they convert their profits from INR back to their home currencies. A significant depreciation of INR, which has fallen by about 45% since 2014, means foreign investors make fewer profits, as the exchange rate diminishes the value of their investments in USD or other currencies.

What role does inflation play in eroding the value of investments in India?

Inflation erodes the value of money over time, meaning the purchasing power of returns diminishes even if investments grow. If inflation in India is around 6%, it diminishes the real value of the returns on investments, making it necessary for investors to target higher returns to preserve their wealth.

What is the 'hurdle rate' and why is it important for FIIs?

The 'hurdle rate' refers to the minimum return rate that FIIs expect to achieve before considering an investment worthwhile. It accounts for factors like inflation, currency depreciation, and taxes. Currently, FIIs are not seeing enough value in the Indian market due to these factors, and their required hurdle rate is not being met, making them hesitant to invest.

How does the depreciation of the Indian Rupee (INR) compare to the US Dollar's depreciation?

The INR has depreciated by approximately 45% since 2014, which is significantly faster than the depreciation of the US Dollar. While the US Dollar has lost about 95% of its buying power since 1930, the INR's rapid depreciation is causing greater concern for both domestic and foreign investors in India.

What is the impact of India's tax structure on foreign investment?

India's tax structure, especially the increase in LTCG tax from 10% to 12.5%, adds another layer of uncertainty for investors. Foreign investors are wary of the potential for higher taxes, as well as the unpredictability of future tax policies. This makes it less appealing to invest in India compared to other markets where tax regimes may be more stable.

Why is the idea of a 20% market correction in India unlikely?

The Indian market has already corrected by about 10-11%, and while market corrections are cyclical, a further significant decline of more than 20% is unlikely due to the resilience of the market and the cyclical nature of stock market trends. Based on current analysis, a correction of around 15% is more probable.

What are the expectations for the Indian market's future performance?

The Indian market is expected to improve once certain economic conditions stabilize. Key factors include an improvement in private consumption, a reduction in global interest rates, and greater government spending efficiency. However, these changes may take one to two years to materialize fully.

What role does private consumption play in India's economic growth?

Private consumption is a crucial driver of India's economic growth. Government spending has provided some momentum in recent years, but for sustained growth, it is essential that private players increase their consumption. The theory is that improved government infrastructure should lead to higher private consumption, but this has yet to materialize significantly.

What is the significance of the workshop mentioned in the video?

The speaker offers a workshop that covers various investment strategies, including stock, real estate, and crypto investing. The workshop aims to provide practical, in-person learning experiences, allowing participants to network with like-minded individuals while gaining deeper insights into different investment styles.