Foreign investors, who poured $4.1 billion into Indian equities in the September quarter, could step up their buying spree in Asia’s third-largest economy if the central bank lowers interest rates in the coming week, a move that could provide strong impetus to a fledgling recovery in manufacturing activity.

Heightened tension along the Line of Control that separates India and Pakistan, and the lingering possibility of terror attacks that have marred bilateral relations, could trigger excessive volatility. Still, pundits say the overwhelming theme among seasoned fund managers is to scoop up shares at dips.

The Reserve Bank of India (RBI) is scheduled to meet on Tuesday to review monetary policy and opinion among economists is divided on the outcome. While some expect new Governor Urjit Patel to kick off his term with a 25 basis point reduction in the benchmark repo rate to 6.25 per cent, others see the central bank staying pat.

The rate decision is expected to be the first by a Monetary Policy Committee (MPC), which includes three independent economists from the academia, and aims to bring more transparency to the process in line with other major economies. Until now the Governor was the sole authority to decide on rates, and he sometimes overruled majority opinion of his advisers.

Under the landmark shift in policy-making, the Governor can swing the decision with a casting vote when there is a tie. The MPC will be responsible for ensuring consumer inflation stays within a range of two-to-six per cent, making fighting price pressures a primary objective of policy.

Consumer inflation fell to a five-month low of 5.05 per cent in August, the latest data available, after rising for months together to a 23-month high. The drop came in the wake of easing prices of food items, particularly pulses that form a primary diet for the country’s 1.3 billion people.

Food inflation eased to 5.91 per cent from 8.35 per cent in July. Good monsoon rains this year is expected to boost farm output and help further cool food inflation in the coming months.

Some investment banks and brokerages, including Citigroup and AK Capital Services, believe the drop in inflation from 6.07 per cent in July opens up the possibility of a quarter point cut in the repo rate. Other economists say the MPC may decide to wait for more data before delivering a rate reduction in December.

Border tensions

Financial markets in India took a beating on Thursday after New Delhi announced that its army commandos conducted a cross border raid to strike at terror camps in Pakistan-controlled Kashmir, a move that has the potential to escalate tensions between the two nuclear-armed rivals. Islamabad denied any such incursions by Indian forces.

Any escalation in hostilities would be bad for the economies of both countries, but there is little likelihood of the skirmishes leading to a full-blown war. However, there is heightened fear of retaliatory terror attacks, particularly in the run up to festivals during October when shopping malls and public places would be teaming with people.

As always the best guide to gauge the emerging situation is to follow the money. On Thursday, when the top-30 Sensex fell as much as 2.7 per cent intraday, both foreign and domestic funds were big buyers, using the opportunity to grab stocks at bargains. Provisional data showed foreigners bought shares worth Rs34.1 billion and domestic funds picked stocks for Rs16.3 billion.

“It’s a good time to use the declines to buy stocks linked to the economy as strikes by India don’t alter the economic outlook,” Sunil Subramaniam, chief executive officer at Sundaram Asset Management Company, which oversees the equivalent of $3.7 billion, told news agency Bloomberg.

Economy upbeat

Improving economic fundamentals should underpin markets, say market pundits. Companies have raised Rs172.83 billion through initial public offerings (IPOs) in the first six months of the current financial year that ends next March, about 3.5 times the amount collected during the same period a year ago. The latest figure is the highest since companies received Rs212.44 billion from IPOs in the first half of 2007-08.

Bulk of the IPOs was by private-sector companies, signalling that business confidence is picking up. IPOs for another Rs125.5 billion are waiting in the wings for launch. Infrastructure output, comprising eight core sectors, rose 3.2 per cent in August thanks to a sharp rise in steel production and a pickup in cement, indicating that construction activity was driving growth.

Central and state governments have been ploughing billions of dollars to build or upgrade highways, railways, bridges, houses, power stations, sea and airports to help ease doing business in India. Data show that the pace of work, although slow, is gathering momentum.

Steel production jumped 17 per cent to a 37-month high, aided in part by the low base of last year, while cement output grew 3.1 per cent from 1.4 per cent rise in July, data released by the Department of Commerce showed. Fertiliser output grew 5.7 per cent compared with a 4.3 per cent contraction in July.

The core sector, which also includes coal, crude oil, natural gas, refinery products and electricity, accounts for nearly 38 per cent of India’s industrial production.

Moody’s Investors Service expects steel consumption in India will exceed growth in gross domestic product forecast at around 7.5 per cent in 2016 and 2017, driven by the government’s support for infrastructure and manufacturing, as well as increasing urbanisation.

Shares in Tata Steel have leapt 77.2 per cent to Rs374.40 from their low of Rs211.30 in February, JSW Steel soared 82.1 per cent to Rs1,731.65 and state-run Steel Authority of India Ltd rose 38.4 per cent to Rs46.35.

Mid-cap boom

The top-30 Sensex and the broader 50-share Nifty, which are both closely tracked by foreign and domestic fund managers, posted their first monthly loss in six months, losing about two per cent each, mainly caused by the sell-off on border tensions. Both the indices also posted their biggest weekly declines since February.

While the Sensex shed 2.8 per cent over the week to 27,865.96, the Nifty lost 2.5 per cent to 8,611.15. Still the indexes posted gains for the second quarter in a row.

The main attraction of investors has been in the mid-cap shares, betting that an improving economy would lift the outlook for smaller companies. The BSE MidCap Index has jumped 40.3 per cent from its February low to 13,166.68 on Friday. It hit an all-time of 13,525.71 on September 7.

The writer is a journalist based in India.