Foreign portfolio investors are pouring billions of dollars into Indian stock and debt markets

Foreign portfolio investors are pouring billions of dollars into Indian stock and debt markets, hoping for potentially better returns while the global economy is yet to pull out of a prolonged slump.

Although the growth rate in Asia’s third largest economy nearly halved to around five per cent in the financial year ended March 31, it was doubtlessly higher than in developed countries and economists expect a rebound to gather momentum in the coming months and in the following year.

“Contrary to conventional wisdom we note evidence that an investment recovery is underway, while the fundamentals suggest the pick-up will be both reasonably robust and sustainable,” investment house Credit Suisse said in a note to investors.

“We are looking for real gross fixed capital formation to expand by around eight per cent in 2013-14 and 12 per cent in 2014-15. Both projections are significantly above the consensus. It seems to us that the market’s bearish view of Indian capex is conditioned by a number of factors, most of which appear to be myths,” it said.

Prime Minister Manmohan Singh’s coalition has been wracked by a spate of corruption scandals, crony capitalism and abysmally poor governance – all undermining the economy which relies primarily on domestic demand. A dysfunctional parliament has further added to the distress.

Still, fund managers and economists at foreign brokerages are putting their money on the line, confident the country’s huge population of more than 1.2 billion, rising incomes and other factors such as a drop in world commodity prices would pave the way for a strong economic rebound and sharply higher corporate profits.

“In modelling real investment growth, we find various interest rate variables, the oil price, export growth and the equity market (designed to pick up profit expectations) to be the key macro drivers, all of which are becoming more supportive,” Credit Suisse said.

Buying frenzy

Foreign funds have moved $17.6 billion into Indian shares and debt since the start of January, with the buying picking up pace in the past two weeks, data from the Securities and Exchange Board of India showed. Inflows in May alone have reached nearly $3 billion and abundant global liquidity is expected to funnel more cash into India.

Industrial output in March grew 2.5 per cent from a year earlier, the best showing in five months and well clear of 0.5 per cent in February, according to government data released on Friday.

“The recovery is nothing much to trumpet but it shows early signs of green shoots,” said equity salesman Jigar Mehta. “With April inflation expected to be around 5.5 per cent, there is a stronger case for another rate cut in June or July and that should augur well for equities.”

The headline inflation data is due on Tuesday and will be watched by the Reserve Bank of India, which has lowered its main policy rate by a total of 75 basis points in 2013 to help revive sagging economic growth.

The top-30 Sensex, which is widely tracked by global fund managers, rose 2.6 per cent this week to 20,082.62. The broader 50-share Nifty gained 2.5 per cent to 6,094.75, its highest close since January 2011.

Headwinds remain

Under fire from all quarters, the government is keen to remove bottlenecks that have held up several large projects for years. The renewed initiative has taken on a tinge of urgency because of national elections that must be held before May next year. New Delhi is also under pressure to tidy its books and ward off a sovereign ratings downgrade.

For investment houses, the government’s decision to free domestic fuel pricing steadily is seen as a vital breakthrough to curtail a massive subsidy bill that had raised the hackles of global ratings agencies. Finance Minister P. Chidambaram’s efforts to kick-start stalled reforms have also heartened global investors.

However, several important legislations needed for reforms such as land acquisition, food security, easier norms for foreign direct investment in insurance and pensions sector have all been stuck because of a deadlock in parliament.

“[The] window for reforms is still open until September, in our view,” Nomura analysts Sonal Varma and Aman Mohunta wrote in a research note. “Parliament will reconvene for the monsoon session in August and will probably be the last window for the government to seek parliament’s approval on some of the key reforms.”

“The land acquisition bill and the food security bill are top priority because of their mass appeal. Additionally, we expect the government to address issues in the coal and power sector. The focus is also likely to be on moderating food price inflation through a much lower increase in minimum support prices and likely using the existing food stocks to lower market prices,” it said.

— The writer is a journalist based in India.