This articled originally appeared in  Economic Times Markets: “ Surcharge rollback not enough: What will it take to bring back FIIs to Dalal Street?  written by Amit Shah.

Surcharge rollback not enough: What will it take to bring back FIIs to Dalal Street? 

FPIs have pulled out a net of $4.8 billion from Indian shares since the end of July. 

Mumbai: Foreign institutional investors (FIIs) continue to be cautious on Indian shares, even as they welcomed Finance Minister Nirmala Sitharaman’s two sets of measures to pump-prime the economy amid concerns over slowing growth in Asia’ s third-largest economy.

FIIs said the initial lack of focus by the government on economic revival and the loss of trust after a set of stringent tax measures in the Budget (which were reversed later) weighed on their sentiment.

These overseas portfolio investors have pulled out a net of $4.8 billion from Indian shares since the end of July. Even after the announcement of stimulus measures, they have been net sellers in more sessions than otherwise.

“The steps taken by the Finance Minister are indeed positive. However, it would take time for trust to rebuild. Knee-jerk reaction, both positive and (earlier) negative, do not augment well for deeper, long-term relationship,” said Sanjay Guglani, CIO of Singapore-based Silverdale Capital.

Last month, Sitharaman unveiled a package that sought to address tax issues, lift credit flow, improve interest rate transmission and also sought to aid the auto sector. She also rolled back the additional tax surcharge on foreign portfolio investors.

In another big-bang announcement, she announced mega merger in 10 public sector banks into four.

He said a 90-day consulting period, followed by draft regulations to be gazetted after 90 days is a good period for long-term investors to align their interests.

“International investors are not shy of taking risks. They are used to investing in countries much riskier than India. What is required is not to suddenly change the rules of engagement,” said Guglani.

Hertta Alava, senior strategist at Nordea, currently has a ‘neutral’ stance on India. “There is so much potential in India, but it is not easy to realise that. The top-down view is not very attractive at the moment, but I like many Indian companies from a long-term perspective,” Alava said in an e-mail from Helsinki.

“Best companies have very high valuations and if the economy remains weak, earnings could disappoint,” she said.

India’s economy grew at its slowest pace in over six years in June quarter following a sharp deceleration in consumer demand and tepid investment. The government has already announced a series of measures in the past weeks as part of its efforts to put growth back on track.

Gross domestic product (GDP) grew 5 per cent in the first quarter of FY20, data released by the government showed, marking the slowest growth since the fourth quarter of FY13. GDP growth was 8% in the year-earlier quarter and 5.8% in the preceding one.

Corporate earnings report cards have been far from promising. Apart from select private banks, earnings are largely not showing concrete signs of recovery.

Earnings downgrades continue for India Inc post June quarter earnings amid a demand slowdown, tepid economic growth and analysts’ over-optimism with their estimates.

A few others sounded optimistic though.

“We remain cautiously positive regarding the prospects of Indian equities outperforming the emerging markets pack. We think the US-China trade conflict will continue to escalate. This is a scenario in which India can benefit in a relative sense,” said Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners

“After all, India is less sensitive to global trade than the EM average. Also, we think the commitment of the Indian government to recapitalise the public-sector banks should be positive for the market in the medium term,” Bakkum said in an e-mail from the Hague, Netherlands.

“And finally, we feel that investors have perhaps become a bit too negative about the Indian growth picture,” he said, adding that FIIs were also fearing that India’s fiscal accounts will deteriorate more.

Bakkum said India was one of his ‘overweights’ in emerging markets space, apart from China and Vietnam.