Speaking to CNBC-TV18 Amandeep Chopra of UTI MF said that foriegn portfolio investors (FPI) aren't gung-ho over emerging markets, especially India. He, however, adds that India isn't a 'Brexit play'. Indian markets never reacted when the sell-offs took place over a Brexit fear. The reason why FPIs are pulling out is because they are trimming their positions.
If Brexit blows over, you could see see some money tricking in on risk-on trades, he said.
Investors have taken comfort from the government's focus on inflation. The long-term yields have come off, he said, adding that the theme has to be sustained for a longer time.
Local markets do derive a lot of comfort from RBI and SEBI and they are the biggest hedge, he said.
Below is the verbatim transcript of Amandeep Chopra’s interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar..
Latha: Is this becoming a worry. Day after day there is bond pull out?
A: Actually after having seen a month where Foreign Institutional Investors (FII) have not really done much on G6 clearly the last three days transactions are little sort of out of sync with what we have seen. But it is more to do with the recent news flow, specially related to the Reserve Bank of India (RBI) governor which would have driven some of it.
The second factor in our view which we have sort of got feedback from some of the FIIs is also to do with the fact that this will be the trimming their exposure in the emerging markets generally given the fact that they still do believe that there is still a chance of Brexit really taking place. So, it is just a little bit of positioning that FIIs are taking right now. If this sustains over the rest of the month then it will clearly be a sign of worry.
Reema: But out of the two factors there is a possibility that the Brexit issues or the Brexit concerns might ease perhaps tomorrow because most people are expecting now that the remain vote is likely to gain traction. Therefore with the Brexit issue out of the window possibly then do you think this Foreign Portfolio Investment (FPI) outflows can reverse in those Indian markets or will the Rajan overhang remain?
A: Like I said it is more to do with the positioning. There seems to be general sense of reducing exposure in the general market particularly to some extent in India but you are right. If you really look at the market movements throughout the month of June and the way the yields have moved markets really never reacted much too when the odds of Brexit was very high earlier and at the same time if you look at the rally which has taken place across the world both in currencies as well as in yields again Indian yields have been fairly stable. So, Indian markets have not really reacted as much when the sell off took place on the concern on Brexit. Similarly today it is more to do with just a brief position trimming from FIIs.
Will the money come back if the vote is stay with the European Union? You could see some money trickling back in. That again could be driven by risk on trades. But we are not really looking at significant inflows coming in from FIIs simply because of other macro factors which I believe, still continue to worry them.
Latha: TO what would you attribute this pull out of FII funds. What are your counterparts abroad, Fidelity etc telling you? Is it that they are worried about the inflation numbers as well because the pull out pre dated Rajan's announcement, of course they have accelerated considerably since the announcement. Was there already a trepidation about Indian yields and Indian inflation numbers?
A: If you look at the numbers ever since the last consumer price index (CPI) came in there has been some degree of nervousness both from FII as well as domestic investors and we have seen little bit of trickling of FII flows from thereon. That only got accelerated with more recent developments and Brexit again does sort of lead them to little bit of portfolio trimming. But again if they were looking at the recent inflation print as well as the current outlook as well as on food, inflation, the pattern of monsoon so far. They would stay a bit worried as far as inflation trajectory is concerned. That seems to be the general theme which I believe is feeding a sense of concern with them. Then clearly when you have seen some rate cuts from other emerging markets like Indonesia where they have had a significant exposures India with a prolonged pause may not really attract them into this sort of environment.
Latha: So, what kind of next RBI governor would keep the faith? Should he be dovish, should he be hawkish, should he reaffirm faith through the MPFA in which case there won't be cuts, just what would keep the money?
A: If you speak to any FIIs the biggest sense of comfort with the current regime clearly has been very strong inflation focus. That is one of the reasons where you have actually seen the long term yields also come off the previous highs and the spread between a 10 and a 30 year government bond has narrowed down. That theme needs to be sustained if you really want to see a long period of lower yields for government bonds.
Latha: If it is exit will our yields do anything at all or are we not really so much a Brexit play?
A: I don't think we are really a very strong Brexit play. Like I said the markets did not react when the world was selling off on fears of Brexit. Similarly the reverse has not been true. The biggest comfort that local markets do derive is clearly from the recent statement from both RBI and SEBI as well as the Government of India. They are our biggest hedge. In our view they will try and sort of moderate any volatility in the market. So, that is going to be quite comforting for local markets.