Foreign investment funds march back into India

Deep-pocketed foreign funds are trooping back into Indian stock markets in the wake of expectations that Asia’s third largest economy may have bottomed out and a recovery would revive investment, boost corporate earnings and ensure higher returns to investors.

In five trading sessions to Thursday, foreign portfolio flows into shares topped $1.3 billion (Dh4.8 billion), data from the Securities and Exchange Board of India showed. That was a big turnaround from being net sellers for much of early April.

“Confidence is returning to the market,” said equity salesman Anmol Bhushan. “There is a strong feeling the worst of bad news is behind us. The big boys have scooped up bargains but prices are still very attractive.”

The top-30 Sensex has risen more than six per cent in two weeks and looks good to maintain the momentum with the weather department forecasting a normal monsoon this year. Bountiful rains, which is crucial for all crops in the nation of more than 1.2 billion people, help rural incomes and spending on a wide range of consumer durables.

Providing a shot in the arm to the bulls will be an interest rate reduction by the Reserve Bank of India on Friday, when the central bank reviews monetary policy. Expectations are for a 25 basis points cut in the short-term repo rate, and a commentary indicating more reductions in the coming months.

Lower borrowing costs could deliver a strong incentive to revive consumer spending and help bolster sales of everything from cars to refrigerators and TVs. It will also encourage companies to pour money into expansion and new projects, both vital to create jobs and boost economic growth that has slowed to its weakest pace in a decade.

Ahead of the RBI decision, the US Federal Reserve and the European Central Bank will hold their meetings and indications are that they would continue with their easy monetary policy, ensuring global liquidity remains well oiled.

Easing interest rates

“For India, the excess cash in the global banking system is good news,” said equity strategist V. Venugopal. “It means portfolio inflows will stay robust as investors chase potentially higher returns.”

C. Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, forecast the nearly $2 trillion economy to expand 6.4 per cent in 2013-14, compared with around 5 per cent estimated for the past financial year ended March. Although the rate is well off the near 10 per cent rise until two years ago, the pace is sharply above those in the US and Europe.

“I believe we have reached the bottom, the economy will now continue to grow at a faster rate,” Rangarajan said. “The very high level of investment rate that we have even now gives us the hope that if we take action for speedy implementation of projects, we can achieve the higher rate of growth quickly even in the short term.”

In a sign of stepped up government initiative, a cabinet panel on Monday cleared several energy and power projects worth billions of dollars. After months of negotiations, Etihad Airways agreed to buy a 24 per cent stake in Jet Airways for about $379 million, and India and the UAE decided to raise weekly flights entitlement by about four-fold.

One of the problems that India’s central bank has faced is the poor transmission of its policy decisions down the line. As a result, the quantum of rate reductions by commercial banks has been far less than the size of cuts by the RBI. This is primarily because banks have been perennially short of cash and have had to raise short-term deposit rates to attract funds.

The finance ministry is now considering a proposal to address this problem, by moving the cash surplus with the government to commercial banks through an auction. This would give banks access to more funds and help lower rates, while the government would also earn interest on the cash hoarding.

Until the plan is accepted, however, the government’s surplus cash — which totalled Rs1 trillion at end-March — will be kept with the RBI and out of the banking system. Meanwhile banks, which borrowed as much as Rs1.6 trillion from the central bank’s daily repo auctions, would continue to be under pressure to manage miss matches in short-term funds.

Appetite for debt

The flush of global liquidity is also driving foreign investors to Indian debt, which offers far better returns and relatively lower risk. A government auction on Monday of entitlement to buy Indian federal debt drew a solid interest. Foreign funds put in bids for Rs 348.5 billion of quota, a third more than the Rs291.08 billion on offer.

Based on the limits won, the foreign investor can buy government debt. Under simplified rules announced early this month, foreign investors can invest up to a combined $25 billion in government debt and up to $51 billion in corporate debt a year.

Such inflows could receive another boost if global rating agencies upgrade their call on India. New Delhi has made a strong pitch with Standard & Poor’s, highlighting measures undertaken to rein in a high fiscal deficit, kickstart investments and revive growth.

“We are simply saying we have taken strong, hard decisions,” Economic Affairs Secretary Arvind Mayaram said after meeting a team of S&P analysts. “This country has shown its determination to put its economy back on track. We believe it will happen.”

Among other things on the radar next week are earnings from Hindustan Unilever, Bharti Airtel, ACC Ltd and Ambuja Cements.

— The writer is a journalist based in India.