January foreign investment likely to exceed $2b

New Delhi: Global equity investors are pouring money into India, betting the world's worst performing major market in 2011 offers the opportunity for the best potential gains when the economy picks up steam.

What started as a trickle of foreign fund-buying at the start of the year has picked up and the inflows are set to top $2 billion (Dh7.34 billion) this month — a huge turnaround after net withdrawals of $500 million last year.

"We have been seeing the frenzy at a garage sale," said equity strategist V. Venugopal. "Many stocks were undervalued and up for grabs. The growing belief that the worst is behind us has added to the bargain hunting."

Riding the wave, the top-30 Sensex has risen for four weeks in a row — the longest weekly run of gains in 16 months. So far this month, the widely-tracked benchmark has gained 11.5 per cent, putting it on track to post its best January in 18 years.

Mean-reversal rally

The index is the world's top performer in 2012, after plunging a quarter last year to bring up the rear end.

"This has been a mean-reversal rally, as the sectors that had fallen the most have risen the most," Credit Suisse said in note, adding an increase in global liquidity also helped India's cause.

Clearly, sectors such as capital goods, financial and property developers that slumped last year have led the rebound thanks to the central bank's change in monetary stance.

The Capital Goods Index has jumped 28 per cent, while metals, real estate and banks have rallied 23-25 per cent. Mid-cap and small cap indexes have also outperformed the Sensex, rising by 14.4 per cent and 17 per cent respectively.

Bolstering growth

The Reserve Bank of India cut the cash reserve ratio by 50 basis points last week, releasing Rs320 billion (Dh23.41 billion) of bank deposits that can be used for giving loans. Although key rates were kept unchanged, the central bank indicated that its main focus was to bolster growth.

World cash flows have swelled following the intervention of several governments from the US to Europe and Asia to rescue their economies. Part of these funds is flowing to India and other emerging markets, many of which are better off than debt-ridden Eurozone countries.

Pricewaterhouse Coopers said India's middle class promises a $1 trillion opportunity in the coming years that can be tapped by consumer-driven industries. It forecast India's population to reach around 1.36 billion by 2021, with a middle class of 570 million.

Venugopal said the rupee's rebound after the battering last year has also helped fence-sitting fund managers to jump in.

Currency strong

"A stronger currency underscores a robust economy," the strategist said. "It provides confidence and eases exchange risk worries."

The rupee has climbed more than nine per cent to 49.30 against the US dollar since hitting a record low of 54.30 in mid-December. The currency had tumbled 16 per cent last year.

Credit Suisse said investors should buy beneficiaries of easy global liquidity like Cairn India, Sterlite Industries, Educomp Solutions, Lanco Infratech, Suzlon Energy, Axis Bank, Infrastructure Development and Finance Corp, State Bank of India and Yes Bank.

It recommended to sell stocks that have risen on mean-reversal but have structural concerns such as Bharat Heavy Electricals, Steel Authority of India and DLF Ltd.

The writer is a journalist based in India.