Ruchir Sharma: Only a weaker dollar can bring foreign investors back to India

Noted investor and author Ruchir Sharma believes that foreign investment will return to India only when the US dollar weakens. His comment comes at a time when Indian stock markets are seeing record FII outflows.

In an interview with India Today News Director Rahul Kanwal, Sharma explained that the key factor hindering the inflow of foreign capital into India is the strength of the dollar.

“The only variable that every investor in India has to look at when it comes to when foreign flows into India will start coming back is when the dollar will come back,” he said. “I think foreign investors will return until the dollar starts to weaken.”

Sharma also noted that unless there is a significant change in the fundamentals of the US market, foreign flows into emerging markets such as India will remain weak.

“Unfortunately, we’re in a paradigm in America today where you need something to break,” he said, referring to America’s massive budget deficits or the potential weakening of the dollar.

“Unless that happens, America and the world will continue to be obsessed with US-only investment, and the prospects for foreign flows to these countries will continue to be pretty bad right now.”

Sharma also explained that US dominance in global financial markets, where stock market capitalization currently accounts for 65% of global market value, is the key reason behind foreign investors’ reluctance to look elsewhere.

“For the last 15 years, post-global financial crisis, the world has been completely dominated financially by America,” he said.

Despite India’s strong performance, Sharma believes investors still view the US as the safest bet. “India is the best-performing emerging market and its returns are exactly the same as America. But frankly, people see going abroad as a much bigger risk and so they don’t think you’re getting enough return for the risk you’re taking,” he explained.

This puts India in a difficult situation as foreign investors see no incentive to shift their capital. “From an investment perspective, there is zero interest in international markets in America,” said Sharma.

“Zero interest, absolutely no one, because they look at the returns of the last 10 to 15 years and they feel like the American stock market is giving us these incredible returns.”

While some capital may temporarily flow to China due to stimulus measures, Sharma remains convinced about its long-term sustainability.

“I think all of this is short-term, because I don’t think it’s sustainable. I don’t think China’s growth story is sustainable enough that people will reallocate capital to China, move away from India. I just don’t think it’s going to happen,” he said.

Sharma is cautiously optimistic that this imbalance cannot last forever. “How can one country have 65% of the world stock market value?” he said and expressed his hope that this dominance would eventually change.