Declining rates, Korea exclusion from EM index, domestic growth to flock FPIs back to India: Nilesh Shah

Nilesh Shah, CEO, Kotak Mahindra AMC

Foreign institutional investors will be back with a bang over the course of new Samvat, believes Nilesh Shah, managing director at Kotak Mahindra Asset Management. In a conversation with Moneycontrol, he said that declining interest rates globally will release flows towards emerging markets and India will be a big beneficiary.

"FPIs are no longer one homogeneous community. There are hedge funds, there are momentum traders, there are India dedicated funds, there are global emerging market funds, and so on and so forth. But if we have to take a broad call, I think declining interest rates globally will release flows towards emerging market. So that is point number one," explained Shah.

Federal Reserve is expected to start cutting interest rates from 2024. Meanwhile since September 1 till date, foreign institutional investors have sold around Rs 44,198 crore in Indian equities. However in the Samvat gone by, FII flows were positive with Rs 1.41 lakh crore inflow.

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Shah gave more reasons on why he sees FIIs making a comeback. "Our own benchmark weight in emerging market indices. HDFC Bank has been included at 50 percent weight. There is no precedence for that, there is no rational behind it. Someday agencies can correct it to full weight," he said.

Furthermore, Korea has banned short selling in its market. "Some people feel that their movement to become a developed market may get restricted because of that. But my feeling is that how can you include Korea in emerging market, when it is already a developed world. Someday agencies will see it. So if Korea gets upgraded, and if HDFC Bank enters at full weight, then we will see an increase in India's weight and hence increase in flows," Shah explained.

South Korea has prohibited stock short-selling until June 2024 to allow regulators to actively improve rules and systems. According to Nuvama Alternative & Quantitative Research, continued regulatory interference is likely to hinder Korea's transition from an Emerging Market (EM) to a Developed Market (DM) in MSCI Index, even in the upcoming August 2024 review. If Korea advances to DM status, India's weightage in EM will increase substantially.

Watch the full Nilesh Shah interview here

Meanwhile, MSCI has used an adjustment factor of 0.50 to compute the weightage of the merged HDFC entity in its indices. The Street had expected full weight to be considered.

"The third thing will be related to our own performance. As long as we deliver on 3G of growth, governance, and green, that means our earnings growth are better than my peer group. Over a period of time, my governance standards should respect capital which is coming in, and I am doing a green transformation of my economy without putting pressure on the environment. These things put together every FPI will be a buyer of India," Shah concluded.