New Delhi: Fitch Group's India Ratings and Research has said that it expects foreign portfolio investment (FPI) flows into India will remain under pressure over the near-to-medium term.


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The Ratings agency said that despite the accommodative global monetary policy stance and the central government’s efforts to alleviate uncertainty regarding the higher surcharge headwinds to FPI flows into India will continue.


“A gamut of factors, such as slower-than-expected demand growth in major economies, geopolitical and trade tensions and a gradual weakening of the economic growth prospects in India, have contributed to a build-up of risk aversion, which has impeded the demand for emerging market (EM) debt instruments,” Ind-Ra said.


Ind-Ra said that the aforesaid factors has been exacerbated by the weakening current account surpluses of major economies, including China and Germany, which has impaired their ability to export capital.


The agency believes this phenomenon is likely to continue over the medium term, with China crowding out capital flows to EMs like India; consequently, FPI inflows would remain under pressure.


Ind-Ra believes that the shift in global monetary policy conditions to a relatively accommodative stance is unlikely to revive capital flows into EMs like India.


While India might occasionally experience pockets of inflows, as discussed previously, global capital inflows are unlikely to pick up sustainably. Moreover, domestic institutional risk appetite remains subdued. Consequently, corporate bond spreads are likely to remain under pressure, Ind-Ra said.


Furthermore, given the continued slowdown in economic activity, the agency expects combined market borrowings of nearly Rs 6.35 trillion by the central and state governments between September 2019 and March 2020.


“Therefore, in case demand for central government paper continues to be tepid through the second half of FY20, the benchmark G-Sec yield curve could come under pressure. This would lead to a further rise in financing costs for private sector borrowers,” Ind-Ra said.