Yield differentials and currency risk may be flying under the radar for most investors, but country head of Jefferies India, Aashish Agarwal, considers them a critical blind spot for the market.
Narrowing yield spreads between the US and India put direct pressure on debt flows and create indirect currency risks for equities. To curb sharp rupee depreciation and narrowing yield differentials, a domestic rate hike could eventually be on the table.
However, Agarwal emphasizes that foreign portfolio investors (FPIs) are primarily watching currency stability. “Currency stability—not yield spread alone—is the key trigger for FPIs. If foreign currency reserves keep the rupee steady, outflows remain manageable.”
Looking beyond macro risks, Jefferies is keeping its options open on home turf. While Agarwal stressed that the firm remains squarely focused on its core strengths for now, he didn't rule out venturing into wealth or asset management down the road, noting that “if the right opportunity arises, you never say never”. Edited excerpts:
What is your view on the current global market volatility, rising inflation expectations, and recent European Central Bank rate hikes? Could this have a long-lasting impact?
The world is definitely a lot more uncertain than it was a few months ago. We are seeing unprecedented volatility across demand, energy prices, and global trade outlooks, and this volatility may stay for a while. However, as a house, we genuinely believe India has always been a great water mark market. Real money is made by staying strong through uncertainty. We believe there are enough companies with very robust earnings outlooks despite current volatility, and investors should focus on finding stocks with strong leadership and visible earnings.
With significant FPI outflows since late 2024 and India largely missing the global AI trade, what is your view on current FPI sentiment? Additionally, given market concerns over the fiscal deficit, liquidity, FCNR (foreign currency non-resident) liabilities, and recent policy moves to stabilize the rupee, how do you see the broader macroeconomic outlook?
Every large-cap was once a small-cap, with that transition driven by sector performance and company leadership or execution. India is currently undergoing a structural transition from sectors that drove growth over the last two to three decades to a new generation of sectors poised to lead over the next decade.
Historically, growth was concentrated in three FPI-dominated sectors: financials, tech services, and select consumer staples. Having reached high penetration, their growth is now normalizing toward GDP (gross domestic product) levels. The next phase of growth will come from more secular sectors—currently mid-caps or large small-caps—that will see their index weights rise. These include infrastructure, power, and hard assets like real estate, hospitals, and hotels, where growth is running at 20-25% or higher.
As was the case 15-20 years ago, the broader index does not fully reflect the stock-picking opportunity, making it essential to identify these next-generation sectors and leaders. This background explains the heavy FPI sell-off over the past two years; slower growth in traditional heavyweights reduced India's weight in EM (emerging market) portfolios, while markets like Korea and Taiwan saw their weights increase.
However, FPI sentiment has shown durable improvement over the last three months, with $5 billion in net inflows since mid-June. As foreign investors evaluate the volatility of global AI and chip trades against India’s correction and better relative valuations, narrowing the earnings growth differential between India and other EMs will be the single most important trigger for sustained FPI flows.
With US yields hardening—the 10-year around 5% and the 30-year near 5.35%—the narrowing yield gap typically triggers FPI outflows. Do you see this as a transient phase, or could it disrupt India's FPI outlook again?
US yields directly affect debt flows, while equity flows face indirect currency risk as the yield differential narrows. India may need to raise interest rates to prevent significant rupee depreciation. Currency stability—not yield spread alone—is the key trigger for FPIs. If foreign currency reserves keep the rupee steady, outflows remain manageable.
Chris Wood has been very bullish on India. Where is the blind spot that even Jefferies might be missing about India?
One thing that not everybody is talking much about is the yield differential and currency risk. The yield differential and its implications for the currency are a potential blind spot for us as a country.
After the Hindenburg episode, Jefferies took a strong stance. What did your analysis capture that others missed?
We didn't view it as a contrarian call; as advisors, we rely on fundamental research. We believe these sectors will drive India's growth over the next decade, and we are firm believers in the India power and infrastructure story. What happened at that time was a displaced-valuation opportunity, offering quality hard assets at very attractive prices. It wasn't just Adani—we have been partners for major transactions for JSW Group, GMR, and other conglomerates. In fact, our first $1 billion block deal was Max Healthcare, done at a time when hospitals were largely overlooked. The unifying theme across these transactions is our long-term conviction in hard assets and infrastructure, backed by great leadership.
Why are FPIs less active in Indian public listings than domestic mutual funds? Are valuations the primary concern?
FPI participation in IPOs is tricky because allocation limits can result in very small allotments for large, high-demand issues. Upcoming major IPOs will test FPI interest. Over the past two years, high valuations, slower earnings growth, and a lower index weight have weighed on FPI sentiment, leading investors to seek quality stocks across broader sectors rather than focusing strictly on tech.
Are you seeing more outbound mergers and acquisitions (M&As) by Indian corporates or strategic buyouts by global private equity firms? Also, how are deal structures shifting between full control buyouts and minority investments?
The activity is driven more by strategic and private equity buyers than by Indian outbound M&A. Indian outbound deals remain smaller and focused on domain expertise, such as acquiring European engineering, aerospace, and defence assets. As for deal structures, it is a mix, but we are seeing more control buyouts rather than minority investments, which has generally been the case.
Why hasn't Jefferies entered wealth management in India, as Morgan Stanley or Julius Baer have? Are there plans for new verticals or joint ventures?
Wealth management is not a business we pursue globally. Across all three of our key verticals, we have scaled up our business in India meaningfully over the last six or seven years. Unlike many American and domestic peers, we do not operate a commercial bank or leverage a corporate balance sheet. Globally and in India, our primary focus remains on excelling in investment banking and equities. That said, as our brand recognition grows across retail, HNIs (high-net-worth individuals), and corporate segments, we may evaluate new verticals such as wealth or asset management in the future. While it is difficult to commit to a timeline, we remain focused on our core strengths—though if the right opportunity arises, you never say never.
Which vertical is driving the highest activity: IPOs, Equity Capital Markets (ECM), or M&As? What themes are you advising clients to play?
We see a very strong pipeline in both M&A and ECM. Traction is high in advisory and M&A, while on IPOs, we remain selective based on deal size and performance thresholds. M&A interest is more global, whereas the IPO market is predominantly driven by domestic mutual funds. Regarding themes, we believe we are in the early stages of a multi-year cycle for hard assets, including hotels, hospitals, and real estate, along with infrastructure and power. We remain active in financials and tech, but hard assets and infrastructure continue to drive the strongest deal momentum.