Global central bank tightening, high crude to restrain FII inflows to India: Kotak Securities

High crude oil prices and global monetary tightening will keep foreign institutional investor (FII) inflows into emerging markets restricted over the next two to three months, Shrikant Chouhan, Head of Equity Research at Kotak Securities, told ANI News in an exclusive interview in Mumbai on Monday.

High crude oil prices and global monetary tightening will keep foreign institutional investor (FII) inflows into emerging markets restricted over the next two to three months, Shrikant Chouhan, Head of Equity Research at Kotak Securities, told ANI News in an exclusive interview in Mumbai on Monday. "The centre point of this overall geopolitical tension is crude prices. And they are just going up and up," Chouhan said. He noted that interest rate hikes by the US Federal Reserve and the Bank of Japan, alongside 5 per cent US bond yields, pose stiff headwinds for foreign liquidity.

"Because of this, it is going to certainly minimise or limit inflows for emerging markets, and India will definitely remain affected," he added. However, he pointed to a potential market rotation favouring India: "If an anti-AI trade emerges in the market, then our markets will benefit, and we can attract foreign flows." Addressing the Closing Auction Session (CAS) debate, Chouhan downplayed structural concerns, noting that price volatility during sessions has narrowed and brokers are aligning with SEBI for a resolution by October 3. "CAS is not the major concern," he asserted.

However, he warned that India's Current Account Deficit (CAD) remains under severe pressure due to an inflated import bill driven by heavy crude oil imports, gold prices elevated at USD 4,300– USD 4,500 an ounce, and expensive microchip and AI technology imports. On the currency front, Chouhan emphasised that nearly 90 per cent of currency depreciation is already priced in, expecting the rupee to remain range-bound between 94 and 97.

"We have already seen the worst levels on the currency side, and I do not think the currency will make new lows in the near future," he stated. "Because of these crude prices, inflation is definitely going to remain high," he added, anticipating that the Reserve Bank of India (RBI) and Monetary Policy Committee (MPC) may initiate interest rate hikes starting in December. In contrast to volatile foreign capital, Chouhan highlighted that domestic institutional and retail flows will remain resilient.

"Domestic flows are going to continue because awareness is very high," he observed, noting how retail investors are increasingly opting for the Systematic Investment Plan (SIP) route. Commenting on the new Merchant Discount Rate (MDR) charges on UPI transactions over Rs 2,000, he reassured that it will not negatively impact the BFSI sector. "In fact, it is going to help banks—both receiving and paying banks—as they will get a share out of the overall charges collected," he said.

Evaluating broader market valuations, Chouhan noted that while benchmark indices broke below 24,000 and 23,500 levels, major support is expected around 22,800–23,000. At 16.5 times forward earnings, he views current levels as a prime entry point for long-term investors. "Unless something goes drastically wrong on the war front, we can see a gradual relief rally this week, potentially reaching levels of 23,600 or 23,800," he added, as crude prices ease and the market pivots toward Q2 earnings and festive demand.

For a 3-to-5-year horizon, Chouhan identified Banking and BFSI as top rebound picks. "Once there is a solution on the war front, we can expect a huge comeback for large-caps, and BFSI looks really good there," he said. He highlighted defence as a top government priority—"even more than railways or infrastructure"—alongside Capital Goods, Electronics Manufacturing Services (EMS), and Renewables to tackle energy import dependency.

He termed Pharmaceuticals an attractive defensive play, while cautioning that Space Technology remains capital-intensive and expensive without direct foreign investment, PE funding, or specific government subsidies. (ANI)