FIIs withdraw US$ 1 billion this July

Foreign Institutional Investors (FIIs) have continued selling Indian shares throughout this month of July, bringing the total exit value to as high as US$ 1.2 billion so far! This is mainly attributable to the increased income-tax surcharge levied on the super-wealthy – a move which has a detrimental impact on foreign investors that are not registered as corporates.

If this selling momentum persists, July 2019 would be the worst month since October 2018. Subdued growth statistics and the ambiguity about the wealth tax affecting foreign investors registered as trusts triggered this selloff. Investors were alarmed when the government proposed to increase the income-tax surcharge on the rich in the Union Budget. Since non-corporate foreign entities fall in this category, the surcharge will impact 40 per cent of FPIs according to various industry estimates.

To make matters worse, the newly appointed Union Finance Minister Nirmala Sitharaman eliminated the possibility of a rollback of the tax surcharge. The months of March, April and May were governed by the inflow of FII funds. The election results in conjunction with the NDA’s victory attracted more investments from FIIs. However, the tax announcements on July 5 has severely arrested the inflow of FII money.

FIIs invested US$ 11.4 billion in Indian equities from February to June. However, for the year to date, they have invested a net of US$ 0.1 billion.

Indian stocks are facing difficulties on account of a number of reasons. The valuation of Indian stocks is higher in comparison to other emerging markets. The banking system is facing liquidity concerns, thereby dampening the growth outlook. Moreover, the dollar is not expected to deteriorate substantially.

The IMF downgraded its growth estimates for India in 2019 and 2020 by 0.3 per cent for both years. As such, India’s GDP is now expected to grow at 7 per cent instead of 7.2 per cent predicted earlier.