FPI Flows Matter, But Don’t Kowtow

The recent behaviour of foreign portfolio investor (FPI) data should raise no alarm. FPIs have been sellers in nine out of 11 trading sessions since June 16, spooked, perhaps, by the strengthening dollar and rising oil prices. However, it is a reminder that the regulators should address FPI concerns, without compromising India’s core interest. Global index provider MSCI — the indices of which are tracked by $1.2 trillion worth of exchange-traded funds worldwide — warned India and four other countries that include China and Brazil against restricting avenues for FPIs. Its Global Market Accessibility Review flagged India’s lack of an avenue for foreign investors to trade among themselves without having to take the regular exchange route. This cannot be resolved without hurting our markets.

A separate platform, it is claimed, will alleviate the problem when the foreign ownership limit is breached (read: it could force recent buyers to sell). However, a separate foreign board will lower the free float, fragment the market and distort price discovery. Two sets of prices, one on the foreign board and another on the domestic platform, will create an unequal playing field for investors (other than FPIs). It goes against the principle whereby MSCI gives higher weights to free float while constructing an index. It means raising the free public float of stock in locally listed companies will increase India’s weightage on the index. Already, the FPI limit has reached 100% in some stocks, following the government’s move to raise the statutory FPI limit of Indian companies to the sectoral foreign investment limit (from April 1, 2020). The MSCI has also praised the move that could trigger an improvement in the rating of India, that is a part of several MSCI indices.

While FPI investment has been liberalised, as to deployment, the MSCI report says that the restrictions imposed on market data use have limited investment opportunities, and could lead to a potential downgrade in market classification. This, surely, can be addressed.