Underlining the significance of domestic flows in the Indian equity market, Credit Suisse expects support from sources at home. Domestic institutional flows at $40 billion in 12 months are now substantially larger than FPI flows, which has declined to nine-year lows.
“We believe the ongoing rebound in FPI inflows may be short-lived (ending once the China market rebound is over), given that they mostly occur via global/regional funds: falling global growth would hurt risk appetite,” the report said.
Of the major parts of DII flows, Credit Suisse expects insurance levels of $12 billion over the past 12 months to sustain. The re-balancing nature of flows from insurance can be offset by improving penetration, it said.
The Employee Provident Fund Organisation’s share of equity AUM now stands at 13%, and with growth in the formal workforce and corpus, these can add $7-8 billion per year, it said.
SIPs in mutual funds can add another $18-20 billion per year. However, non-SIP equity investments will continue to moderate, considering the equity risk premium is now negative and the real-estate market is improving, it said.
“Overall, we expect flows to support the market, though it remains vulnerable to global shocks,” the report said.
According to Mishra, on the economic front, India is in a strong position, though external pressures are a concern.
“Domestic drivers of growth are very much intact. Fiscally, the higher tax to GDP [ratio] gives a lot of comfort to people. The inflationary pressures are also easing,” he said.
In terms of external pressures, he mentioned slowdown in exports. “The reason for being worried about balance of payments has shifted from high energy prices to weak exports as well as potential risk of capital outflows,” Mishra said.
In its forward-looking report, the agency termed consensus estimates as “too conservative”.
“While the substantially higher three-year CAGR in several concurrent indicators may be biased towards the formal economy, growth in energy demand, which tends to lag GDP growth due to improving energy efficiency, also suggests the current pace of output is several percentage points above current consensus,” the report said.
The agency highlighted green shoots in low income consumption, as the services economy normalises. The sharp drop in government cash balances suggests bottlenecks in government spending are easing too, it said.
“The lagged effect of rate hikes, a sharply slowing global economy and the need to bridge the balance-of-payments deficit mean that the growth momentum may fade. However, it would still be higher than the current consensus forecast of 6% GDP growth in FY24,” Credit Suisse said.