Impact of China’s economic stimulus or bailout measures on Foreign Portfolio Investment (FPI) inflows in India

China’s economic stimulus or bailout measures can have significant effects on Foreign Portfolio Investment (FPI) inflows in India through a few key channels:

1. Shift in Investor Focus to China

• If China’s stimulus policies appear effective in stabilizing its economy or boosting growth, global investors might see China as a more attractive investment destination. Consequently, some FPIs may shift their focus and capital from India and other emerging markets to China to capitalize on expected returns.
• This could lead to reduced FPI inflows into India, especially in sectors where China and India are viewed as competing investment destinations, like technology, manufacturing, and infrastructure.

2. Increased Risk Appetite for Emerging Markets

• Conversely, a stable and growing Chinese economy could improve global investor sentiment toward all emerging markets, including India. This positive outlook can boost investor confidence and create a ripple effect, leading to increased FPI inflows into India as well.
• Investors looking to diversify within emerging markets might continue or even increase their investment in India, seeking long-term growth prospects beyond China alone.

3. Currency Impact and Interest Rate Differential

• China’s stimulus, especially if it involves substantial monetary easing, might weaken the Chinese yuan relative to other currencies, including the Indian rupee. A weaker yuan may enhance China’s export competitiveness but could also lead to currency volatility in the region.
• For India, currency stability is attractive to FPIs; if the rupee remains relatively stable, it could make Indian assets more appealing compared to those in China or other emerging markets facing currency fluctuations.

4. Sectoral FPI Flows and Competitive Landscape

• China’s targeted bailouts, especially in sectors like real estate, technology, or consumer goods, can affect sectoral FPI flows in India. For instance, if China’s stimulus significantly boosts its technology sector, it may draw FPI away from India’s tech sector.
• On the other hand, if China’s measures focus on stabilizing its real estate sector, this may have less impact on Indian FPIs since India’s real estate sector is structured differently and less dependent on FPI.

5. Impact on Commodities and Inflation

• China’s stimulus measures can influence global demand for commodities, impacting prices. If commodity prices (like oil or metals) rise due to increased Chinese demand, India’s import costs could increase, affecting inflation and corporate profit margins in India.
• Higher inflation or pressure on the current account could dampen India’s economic outlook, making it less attractive for FPIs and potentially slowing inflows.