Waning portfolio flows not a major macro concern

Foreign investor appetite for Indian assets has faded in recent weeks. Inflows into the equity market have waned, while foreigners have turned into net sellers of Indian debt. This chimes with movements in portfolio flows in other major EMs, suggesting that global factors have been at play. In particular, the rise in US Treasury yields and concerns about a re-run of the 2013 “Taper Tantrum” has played on investors’ minds. However, outflows have been much smaller than they were in 2013. And even if they do pick up, India’s economy is much better placed to cope with a sustained bout of capital outflows than it was in 2013. After all, the current account is in surplus, FX reserves are at all-time highs and the rupee does not look overvalued. One consequence of this is that the RBI will not be in an immediate rush to tighten monetary policy.