FIIs may avoid India: Emkay CIO

India’s benchmark equity index may struggle to attract foreign institutional investor (FII) money as the Nifty 50 remains heavily skewed toward banking and information technology (IT) stocks, sectors facing slowing growth and structural disruption from artificial intelligence (AI), according to Manish Sonthalia, chief investment officer (CIO) at Emkay Investment Managers.

- Srushti Vaidya

The IT services business model is getting disrupted through AI, Sonthalia said in an interview with Mint, adding that banking system growth is likely to remain around 10-12%. At current Nifty valuations of 22-23x earnings, that may not be attractive enough for FIIs, he said, arguing that domestic institutional investors (DIIs) may have to continue supporting Indian markets in the near term.

DIIs have pumped ₹3.5 trillion into equities as of May, equivalent to 40% of last year’s inflows in just four months. Will the optimism sustain, and do you see excessive DII flows as a concern?

There is enough maturity among investors. If some old investors are leaving and closing their SIPs (systematic investment plans), we are seeing some new investors coming in. Interest rates have also been a reason why we have seen so much optimism in markets. With fixed deposits currently offering post-tax returns of around 5%, against 5% inflation, equities remain attractive. But if deposit rates rise to 8%, investors could shift from equity to zero-risk debt instruments.

For FIIs, the dollar returns are not that great with the rupee depreciating. In such a scenario, I do not really see FIIs coming to Indian markets in the near future so all the heavy lifting of returns has to happen from domestic investors. But do we require foreign capital?

Absolutely yes. We cannot aspire to grow at 8-9% GDP without foreign capital. With domestic flows we may grow only at 5-6% GDP.

How do you see rupee at 96 to a dollar impacting foreign flows? What macro risks do you see?