Worried by global jitters, what are foreign investors thinking about India?

MUMBAI: Several overseas investors consider India as one of the best growth stories in the years to come. Ideally, this should mean unabated flows into domestic equities in 2015 too. But, foreign institutions are in no hurry to lap up every stock comes their way after pumping about $16 billion into Indian stocks in 2014. In fact, these deep-pocketed investors turned net sellers in December and have shown no signs of returning in a big way yet.

While niggling concern over pricey valuation of Indian stocks is a reason, the bigger causes for worry are overseas: the direction of the dollar and the events unfolding in the eurozone.

Most global investors are already factoring in the prospect of a stronger dollar against emerging market currencies in 2015 amid expectations of a stronger US economy and worries about interest rate hike in the US. But, what is nagging them is the lack of clarity on the impact of a probable Greek exit from the euro zone on financial markets.

Barry Eichengreen, an economic historian at the University of California at Berkeley warned that if the new Greek government elected later this month decides to leave the eurozone, its impact on the global financial markets would be even worse than the collapse of Lehman Brothers in 2008. This would spark speculation about which would be the next country to exit the region, he said.

These investors dread another Lehman-like situation as there is considerable froth in emerging market equity valuations including India’s. Though India is in a much better situation to handle foreign institutional outflows and a weakening rupee than in 2013, a decline in the Indian currency will only delay cuts in interest rates by the Reserve Bank of India.

Now, this could be dangerous for India because foreign institutional investors pumped $26 billion into Indian bonds in 2014—even more than equity investments. Unlike stocks, foreign fund flows into debt is not sticky because majority of the money has come from mutual funds and not the conventionally stable sovereign funds.

Aggressive withdrawals from the debt segment by FIIs could have a cascading effect, harming both the rupee and the stock market. So, it does not come as a surprise that many affluent foreign investors are on a watch mode in 2015, which promises to be a heady mix of uncertainty and fear.