FIIs Won't Return to India Without New Growth Engines: Bernstein
Bernstein warns that sustained FII inflows depend on India building globally competitive industries like semiconductors and energy storage.
FII flows in India are unlikely to see a massive surge even if the current artificial intelligence trend reaches its peak, according to a recent report by brokerage firm Bernstein. The firm suggests that for a sustained revival of foreign capital to occur, India must move beyond its current economic drivers and establish itself as a global leader in high-tech manufacturing sectors.
The Need for New Competitiveness
Bernstein’s analysis highlights that a structural comeback of foreign institutional investors (FIIs) requires India to create "new engines of competitiveness, innovation, and global relevance." While the brokerage acknowledged some progress in specific high-tech sectors, it cautioned that these are not yet large enough to shift global capital flows significantly.
To attract large-scale foreign investment, India needs to demonstrate world-class capabilities in several critical areas:
- Advanced Semiconductor Manufacturing: Moving up the value chain in chip production.
- Energy Storage: Developing robust battery technologies and energy self-sufficiency.
- Global Market Share: Creating businesses that can compete and win on a global scale.
While the report noted early signs of momentum in space, defence, semiconductors, and deep-tech, these sectors currently remain too small to materially impact global investment decisions.
A Shift in Investment Dynamics
The landscape of foreign investment in India has undergone a dramatic transformation. Over the last 24 months, FIIs have recorded combined outflows of USD 56.3 billion. This stands in stark contrast to the preceding 24-month period, which saw inflows of USD 38.6 billion. In the last two years alone, FIIs have withdrawn a total of USD 40 billion from Indian equities.
Bernstein points out that the traditional drivers of these flows are changing:
- Weakening Links: The historical relationship between FII flows and India’s overall economic growth has weakened. Similarly, the link between Indian and US interest-rate differentials has faded.
- New Deciding Factors: Investors are now prioritizing currency movements, relative valuations, and forward earnings revisions.
The Impact of the Rupee and Valuations
The performance of the Indian rupee has become a critical variable. Bernstein noted that the correlation between FII flows and the currency has risen above 70 per cent in recent years. This suggests that a weakening rupee is making investment returns less attractive when measured in US dollar terms.
Furthermore, high market valuations are acting as a deterrent. The brokerage's analysis indicates that rising relative valuations have coincided with weaker FII inflows in recent years, making it increasingly difficult to attract foreign capital into the Indian market.
Ultimately, Bernstein concludes that foreign investors are not simply waiting for current market uncertainties to pass. Instead, sustained participation will depend on India's ability to foster a new generation of companies that are globally competitive.