India's economy is gaining momentum, corporate profit growth remains solid and the rupee has stabilised. Yet foreign portfolio investors have both structural and tactical reasons to stay cautious on Indian equities, according to Neelkanth Mishra, Executive Director, The World Bank Group.
In an exclusive conversation with Moneycontrol, Mishra said, the structural problem is a reversal in the relative cost of capital between India and the rest of the world.
India's fiscal discipline has helped bring down its domestic cost of capital—a positive development for entrepreneurs, businesses and asset prices. But the global cost of capital has risen at the same time, changing the gradient that had previously pulled money toward Indian assets.
Mishra likens the shift to the flow of water. When risk-free rates in India were around 8% and those in developed markets were closer to 2%, capital naturally moved in one direction. Now, rates that were around 2% have risen to about 4.8%, while India's have fallen from around 8% to 6.8%.
On a currency-hedged basis, the relative economics of deploying capital have therefore changed.