MUMBAI: Global investors are cautious on India because of expensive valuations, but intrigued by domestic households buying stocks, Swiss brokerage UBS said on Tuesday.
They are also questioning the near-term sustainability of the bets being taken by the retail investors, it said in a report, adding that the net outflows by foreign institutional investors (FIIs) are indicative of the same views.
It said in the ongoing September quarter, FIIs have so far pulled out USD 1.1 billion on a net basis as against inflows of USD 0.8 billion and USD 7.3 billion in the preceding two quarters.
Even as the FIIs are pulling out money, households have been "investing heavily" in the market and net purchased USD 5 billion in equities in the June 2021 quarter.
Retail direct ownership is at a 12-year high, UBS noted.
Flows from domestic mutual funds have also turned positive after four quarters, and risk of a COVID-19 third wave, ramp-up in vaccinations and earnings momentum are keys to market sentiment, it said.
There is little room for re-rating given the expensive valuations, it said, adding that if low absolute returns continue, that could lead to fatigue in retail flows -- especially as bank deposit rates probably have bottomed out.
The brokerage further said it expects India's GDP to grow by a below-consensus 8.9 per cent in FY22.
Aspects like reopening of the economy will lead to a 15 per cent quarter-on-quarter growth in GDP for the July-September period after an 11 per cent contraction in the June quarter, it added.
UBS expects India to inoculate 40 per cent of the total population or 55 per cent of the adult population by December 2021.
"In our base case, we expect India's economic growth to gain momentum from H2FY22 (between October 2021 and March 2022) on pent-up demand (largely led by contact-intensive services, especially after more people are vaccinated), favourable external demand (on strong global growth) and higher government spending (likely towards capex)," it said.
Public debt has reached 88 per cent of GDP in FY21, up from 72 per cent a year-ago, and the GDP has to grow at 10 per cent on a nominal basis to make it sustainable.
"Any lags in policy execution and implementation of growth-supportive reform to boost sustainable growth could lead to widening macro stability risks.
"In our base case, we foresee a risk of a downgrade in India's sovereign rating by one of the three rating agencies in the next 12-18 months," it warned.
Even as the government pushes companies for capital expenditure on areas such as infrastructure, the brokerage said it does not foresee any meaningful step-up in corporate investment in the next couple of years.
It also said inflation will average 5.5 per cent in FY22 which will result in a status quo in rates till June 2022 by RBI.
The central bank will launch another round of variable reverse repo rate auctions before hiking the reverse repo rate and ultimately shift the policy stance to neutral from accommodative, it said.