InvestorQ : When you watch the business channels, they keep talking about risk-on and risk-off investing? What does this mean for the Indian markets and why is it relevant?
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When you watch the business channels, they keep talking about risk-on and risk-off investing? What does this mean for the Indian markets and why is it relevant?

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2 years ago
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The term risk-off and risk-on largely refers to the actions of foreign institutional investors who are normally quite active in the markets. It shows whether they are willing to take on more risk or they want to play it safe and take on lesser risk. Risk on is taking more risk while risk off is taking on less risk. It is a risk averse strategy.

Let us now look at what is meant by risk-off and risk-on trading by Foreign Portfolio investors (FPIs)? Risk-off buying refers to FPIs preferring the safety of putting money in developed markets in search of safety and stability. Risk-on buying, on the other hand, refers to FPIs investing more in high risk emerging markets in search of alpha. Normally, when there is uncertainty in the global economy, FPIs tend to prefer risk-off investing while they prefer risk-on investing when they are positive on the growth of the global economy overall.

While Asian emerging markets refer to a number of key economies like Taiwan, South Korea, Indonesia, China and India; the one economy that stands out in terms of higher growth potential and less dependence on dollar and commodities is the Indian economy. There is an interesting trend in terms of FPI flows into India. Between October 2016 and January 2017, FPIs pulled out nearly $12.51 billion from Indian equity and debt investments signalling a clear shift to risk-off investing. Apart from the prospects of the US Fed hiking rates, the demonetization also dampened FPI interest in India. However, the tables appear to have turned sharply between February 2017 and April 2017. During this period, FPIs infused a massive $14.50 billion into Indian equity and debt wiping off the entire outflow of the previous four months. Similarly, FPIs infused more than $10 billion between March and June 2019 ahead of the general election outcome where they were expecting a stable government. AT these times you get to see that the investment approach of FPIs to India has decisively shifted from risk-off to risk-on?

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