FIIs Finding Better Value In Other Asian Markets: Jefferies India | CNBC TV18

Added: 2026-05-26

[00:00:00]focus back to the macros because after three straight days of gains the rupee has opened down about.16% today. It is now trading at around 9541 to the dollar that's down almost 20 pes as we speak.

[00:00:12]So uh you know markets are really reacting to the news of the US strikes in Iran that caused the crude prices to jump more than 1% and that's putting some downward pressure on the rupee today crude prices at about 9846 to the dollar. Now, RBI also has scheduled a $5 billion currency swap auction today to boost liquidity. That's also another key trigger for the markets to keep in mind.

[00:00:33]But Jeffre has put out a note now on the rupee arguing that it is not the current account deficit, but rather the all-time low capital flows that is the main culprit for our weakening currency. Now, they argue that India's external balances are still manageable, but they warn that persistent FBI exits are now becoming the bigger macro risk. Joining us now is Mahesh Nandurkar, MD and head of India research at Jeffrey's India who's authored this report and is with us now. Mahesh, thanks very much for speaking with us. And let's start with that central argument in your report on capital flows pressuring the rupee more than CAD. Have the markets not fully grasp this kind of a shift?

[00:01:13]>> Yeah. Hi, thank you for inviting me here. Um, yes, clearly what we have, you know, always known is that you know India is a current account deficit country. uh but that has always been uh more than compensated for by the capital inflows or the capital surplus uh and if you now look at the numbers for the last 2 to three years India's current account deficit is actually very well behaved well under 1% of GDP so that's on the lower side uh of the historical range but what is really the problem is the capital surplus um and that's compared to almost 250 to 260 basis points of GDP or 2.6% of GDP which was the average capital surplus uh for the last 10 years last two years which is FI26 and FI25 the capital surplus has gone down to just five.5% or 6%. So that's a big big shortfall in terms of capital surplus and one of the biggest contributors to the capital surplus going down uh is the is the outflows that we've seen uh by various entities but routed through equity markets and those various entities are the foreign portfolio investors, foreign promoters uh who have sold down stakes in the listed Indian companies uh or a few that have underwent IPOs uh But once again it means that the promoters have sold down their stake through the listed you know entity route and finally the private equity you know investors. So if you put all these three types of entities together uh we've seen almost $80 billion of capital flight over the last two years and uh yeah and and that I think is one of the key reasons uh why the currency is under pressure >> right uh you know Mahes the RBI governor says that the Indian rupee is undervalued and your report says the same has the market simply become too negative on INR at this point what's the outlook from here on what changes it.

[00:03:18]I definitely think that uh the currency has uh uh has has corrected enough and as you rightly mentioned our analysis shows that uh barring the global financial crisis as an example the rupee has uh usually stayed uh you know stronger or has usually kind of you know tended to bottom out at levels like these uh and levels like 91 or 90 which is almost 9 to 10% undervaluation for the currency uh definitely looks attractive uh in the context of Historically over the last 10 years or so uh the rupee has actually on the average been at 105 level mean like 5% overvalued. Um so uh yeah so the rupee levels are looking attractive and if we really end up seeing some kind of an end or some kind of a resolution uh to the Middle Eastern war um then I think there are reasons to believe that rupee can actually uh strengthen from here on. uh so to that extent uh I would say that the outlook for rupee uh looks interesting. The only other thing that we need to keep in mind uh is that the is is is is that the capital flight especially from the equity markets uh is is you know a function of one uh what's happening in the other Asian markets or happening in the other global markets uh wherein the dominant investment theme for global capital is actually AI and at this point in time the global capital is actually chasing uh this theme this AI is the investment theme uh in obviously the markets like US but also the other markets like Korea and Taiwan. So the second leg or or the second factor that we need to keep in mind outside of the Iran war uh is what happens to AI as the global investment theme. And if that theme continues to remain uh very very attractive then on the foreign portfolio investor side uh we may not necessarily see any quick reversal in the immediate future.

[00:05:28]>> All right. Right. So the AI trade is another factor to keep in mind for the rupee. But you know you you you've also linked part of the pressure to this downside of SIPs. Essentially you're saying strong domestic inflows have enabled foreign investors to exit. But even at these valuations, these rich valuations, do you think even strong SIP inflows could eventually struggle to counter the sustained outflows that we're seeing?

[00:05:52]I mean I would definitely say that uh the ease with which the foreign capital has been able to uh you know sell the Indian holdings uh is is because uh you know the domestic sources are really absorbing that selling with ease and because of which um uh the valuations haven't really gone down enough. uh if you look at you know in a pre-COVID era this type of foreign selling would have resulted in market correction and uh at the lower valuations then the foreign selling goes down automatically but that automatic correction has not happened over the last couple of years because of the uh strong domestic flows which as I said includes not just mutual funds but also uh the other kind of flows like provident fund and insurance schemes as well.

[00:06:41]So my yeah so my sense is that uh you know given uh you know the valuation differential or let's say the valuation premium that India still enjoys uh today versus the rest of Asia. I mean Indian P multiples are roughly at about 20 times whereas um you know the rest of Asia the rest of emerging market multiples are still uh in the range of around 13 to 14 times. So India still trades at a good 60 to 70% premium uh to to the other you know emerging markets. So my sense is that uh if if the strong domestic inflows u you know sustain then I think we might see some uh you know some some more of you know of foreign capital exit as well >> right and you've highlighted that net FDI2 has collapsed in part because of promoter exits PA selldowns and outbound Indian investments is that the more worrying trend here for India are foreign investors basically telling us that valuations in India have just become too expensive to commit fresh long-term capital. What will it take for foreign flows to come back? I mean that's the million billion whatever number you put dollar question.

[00:07:54]Sure that's a very good question. So see at this point in time or maybe actually at any point in time the foreign investors always have various options right I mean they can invest in India they can invest in China or Korea or Taiwan or any other part of the world.

[00:08:08]Um and clearly what has happened you know just to kind of recap what we just discussed is you know AI as an investment theme has driven strong corporate earnings growth in many of these markets. I mean if you look at uh the EPS growth in Korea or EPS growth in Taiwan uh you know those numbers are actually upwards of 50 to 60% uh in US dollar terms right so in the context of you know in the context of very very strong uh corporate EPS growth and that to you know coming in at a valuation which is actually not you know much lower uh than where the Indian P multiples you know are uh so that has created uh riskreward uh to actually move away from India into some of these other markets. uh which is what exactly these foreign investors are uh you know exploiting at this point in time and that arbitrage or I would say that uh you know that that riskreward equation is still unfavorable uh for Indian equities at this point in time uh because you know our EPS growth or you know Indian corporate sector EPS growth uh which is say between uh 13 to 15% in rupee terms in dollar terms that number would be lower uh because of the currency depreciation but in rupee terms that numbers about 13 to 15%. uh and dollar terms that number would probably be in like single digits uh doesn't compare favorably with as I mentioned this 50 60% type of EPS growth in dollar terms that we are seeing in the other markets and that imbalance has also been created because as I mentioned AI and because that AI uh you know in turn has driven uh the upward revision in memory pricing DRAM pricing uh which has been uh you know leveraged by several uh sort of companies large companies in Korea and Taiwan. So my sense is that um you know unless and until that equation changes or or AI as the key investment theme you know changes um the riskreward will probably uh you know continue to be sort of not so good for Indian equities uh you know if one looks at it from the lenses of uh you know a typical foreign investor.

[00:10:28]take that point. Uh you know just to conclude the thoughts on the equity market outlook from here on you know the fuel price hikes coming through the risk of tighter rates returning many people now talking about that in the market as well. Uh do you think the market may have to start factoring in some downgrades uh the near-term outlook for the markets? Do we expect you know this rangebound kind of a trade similar kind of returns or where does the market go from here?

[00:10:51]Yeah, we have seen some earnings revisions uh but that's quite natural right you know with the oil you know the way the uh you know way the oil prices have moved and the kind of some of the shortage that we've seen on the gas side etc. And we also seen the statements made by uh the prime minister uh you know advising some sort of austerity as well. So all these kind of things are bound uh to drive some earnings revisions uh and which are happening. So in fact when we started this financial year uh we were looking at almost 16% uh EPS growth for FI27 uh that number has come down to you know in the range of 13 to 14% as we speak and maybe one or two percentage point of further revision on the downside you know is likely uh but that's not too alarming in my view because uh you know even an 11 12% you know EPS growth on an absolute basis is actually uh you know pretty respectable number in the context of what has been happening uh in the Middle East. Um so my sense is that uh yes I mean to answer your question yes earnings revision on the downside is happening uh but uh the underlying strength or the underlying uh developments in the economy or on the corporate earning side are on the positive side. I mean we are seeing that uh in the form of uh credit uh you know growth improving and we are seeing this in the form of uh uh you know the auto demand growth and certain other consumption demand growth uh you know drivers or indicators are you know looking reasonably good. Um but yes uh there is there is this Iran factor that is driving some EPS revisions on the downside. Uh hopefully uh we will see um you know end of the hostilities there sooner rather than later.

[00:12:38]>> All right. Uh thanks a lot for joining in. Uh quite a conversation this but let's see what happens from here on. We all hope for the foreign inflows to return. We all hope for the rupee to appreciate and we all hope for things to be a lot better on our uh capital account and current account deficit front as well. With that uh we'll take your leave but uh talk about what's impacting all of this. It's the bond market right. We have Manisha Gupta joining in on the other side.