FPI flows into India may remain weak in 2022, according to a recent note by Goldman Sachs, which now forecasts $5 billion in foreign portfolio investment into India in 2022, down from their previous prediction of $30 billion, with risks skewed to the downside.
According to a statement from BofA Securities, equity inflows reached over $40 billion over the last three years from 2019 to 2021, with roughly $14 billion leaving in the first quarter of 2022. (Q1-2022).
"The inflows were fueled by tax cuts, as well as the government's strong emphasis on encouraging economy and loose monetary policy." "Growth momentum would need to hold up in order to attract fresh allocation," according to the BofA Securities note, as the RBI steadily tightens liquidity conditions and raises interest rates starting in mid-2022.
"India has already seen $15 billion in equity outflows YTD, and the largest insurance company's IPO has been postponed." Furthermore, with no mention of India's inclusion in global bond indices in the Union Budget, there are risks to our already cautious base case assumption of an announcement of India's likely inclusion in the GBI-EM Global Diversified Bond Index in Q4-2022," wrote Andrew Tilton, Goldman Sachs' chief Asia-Pacific economist, in a report co-authored with Santanu Sengupta and Suraj Kumar.
"Fixed income inflows in India may continue modest," he adds, "with our expectation of monetary policy normalisation in India and the US economics team's view of additional 200 basis point (bp) rate hikes by the Fed in 2022."
Given recent global developments and their impact on India's macros, Goldman Sachs forecasts a $65 billion overall capital account surplus in the calendar year 2022 (CY22), down from $88 billion in CY21, and a $50 billion balance of payment (BoP) deficit in CY22 (from $55 billion in CY21 and over $100 billion in CY20).
Despite hints of a thaw in geopolitical tensions, Goldman Sachs expects commodity prices to remain elevated in the coming months, as the sanctions imposed on Russian firms are expected to remain in place for some time, further restricting supply in an already tight commodity market.