Cash-flush global funds chase India shares

Rising appetite for risk assets is pulling cash into Indian equities as money managers hunt for better returns amid abundant global liquidity and falling interest rates in major economies. Stocks may appear pricey now, but improving earnings make them a good bet in the longer term, say market pundits.

Overseas investors are net buyers of Indian shares for 25 trading days in a row, the longest stretch since Prime Minister Narendra Modi rode to power in a landslide election victory more than two years ago. The inflows into stocks so far this year have topped $5.5 billion, and looks to continue in the wake of excess global liquidity.

Global equity funds received $6.5 billion of inflows in the week to Wednesday, riding revived demand for US equities and the rising wave into emerging markets, according to the Bank of America-Merrill Lynch.

Quarterly earnings of companies have mostly met or exceeded expectations, and the consensus outlook is for stronger results in the months ahead. Domestic demand is set to rise in the coming festival months, with an added impetus from the higher pay packets for central government staff and pensioners.

“To me the money should be in Indian equities because advanced economies are at 2 per cent growth, emerging (countries) are at 6 per cent and we are at close to 8 per cent,” Sunil Subramaniam at Sundaram Mutual Fund told ET Now television channel.

“So, if your money should be here it is only going to get a boost when the FDI money comes in. Last year, we got the highest FDI.”

Robust FDIs

New Delhi has been wooing foreign direct investment (FDI) in a big way, with Modi’s pet “Make in India” campaign, which aims to make the nation of 1.3 billion people a manufacturing hub for industries. The government is pouring billions of dollars to build or upgrade national highways, has bolstered power generation capacity and pushed reforms to make it easier to do business.

FDI inflows in the financial year that ended in March hit a record $55.46 billion, according to the Department of Industrial Policy and Promotion, from $36.04 billion two years earlier.

In June, the government eased rules for FDIs in a wide range of sectors, including food products, broadcast media, telecommunication, defence, civil aviation, pharmaceuticals, single-brand retail and animal husbandry. These measures are expected to pave the way for a jump in investments to feed a market that is expanding at a fast clip.

World automobile giants are building new factories or expanding their capacity to meet growing demand, including for export markets. Some big ticket foreign direct investments in defence-related ventures are also being negotiated. State-controlled Steel Authority of India Ltd, the country’s biggest domestic producer of the metal, is shrugging off a global glut and pumping cash into expanding output to meet an expected jump in demand as the subcontinent boosts infrastructure spending.

Banks results mixed

Shares in State Bank of India leapt more than 7 per cent on Friday after the country’s biggest lender met forecasts for earnings and indicated that it has got a firm grip over the bad loans problem that has weighed on the banking sector after the central bank tightened rules on accounting standards.

SBI, which controls more than a fifth of India’s banking activity, said its June quarter profit dropped 32 per cent to Rs. 25.21 billion, almost in line with expectations, while its provisions for bad loans fell to Rs. 63.4 billion from Rs. 121.39 billion in the March quarter.

The state-run bank is better placed due to a higher share of low-cost deposits, a comfortable capital ratio and improving operating profitability, Goldman Sachs said this month.

Bank of Baroda, the second-biggest state-run lender by assets, posted a 60 per cent fall in April-June net profit and said a recovery was two quarters away. Still, it was the first quarterly profit after two successive quarters of losses due to heavy provisions for bad loans.

Chief Executive P.S. Jayakumar said the bank’s bad loans are likely to rise to between Rs. 450 billion and Rs. 500 billion by the end of the fiscal year to March, with a bias towards the lower end of the range. Gross bad loans climbed to about Rs. 430 billion, or 11.15 per cent of total loans, at end-June, from almost 10 per cent in March.

Two other state-run lenders, Indian Overseas Bank and UCO Bank, reported quarterly losses as their sticky loans provisioning widened.

Inflation, rates

The Reserve Bank of India kept interest rates unchanged, as expected, at its policy review because of “upside” risks to inflation. “It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action,” Governor Raghuram Rajan said in his statement.

Three days after the policy announcement, official data on Friday showed that retail inflation shot up to 6.07 per cent in July, above forecasts by economists and up from 5.77 per cent in June, powered by an 8.35 per cent surge in food prices.

Rajan, who has cut the repo rate by 150 basis points since January last year to a five-year low of 6.5 per cent, leaves office on September 4 when his three-year term ends. After announcing his last policy review, Rajan, a former chief economist of the International Monetary Fund, said the RBI’s policy stance should remain “accommodative”.

However, with consumer price inflation staying above the central bank’s target of 5 per cent by March 2017 for a fourth straight month, there will be hardly any space for loosening. The saving grace is the good monsoon rains that have brightened the prospects for higher farm output and a cooling of food prices.

“We are continuing to see one more rate cut by the end of the year, considering the fact that inflation trajectory will slow down materially in the second half of the year as seasonal factors correct and base effect fades,” said Madhavi Arora, economist at Kotak Mahindra Bank.

Bank IPO

Private-sector RBL Bank, in which Asian Development Bank and CDC Group Plc own stakes, will launch an initial public offering on Wednesday, aiming to raise up to Rs. 12.13 billion. It would be the country’s first IPO by a bank in six years, since state-run Punjab & Sind Bank went public in 2010.

Founded in 1943, the Kolhapur-based lender in Maharashtra is selling new shares in a price band of Rs. 224-225 for up to Rs. 8.33 billion to shore up its capital base. Some of its shareholders are also paring their stakes by selling up to 16.9 million shares in the IPO that closes on August 23.

The lender had raised Rs. 4.88 billion last December through a preferential placement to international investors.

The top-30 Sensex rebounded from a midweek profit-taking spree to post a third successive weekly gain at 28,152.40, lifted by sustained foreign fund buying.

Robust capital inflows have pushed up foreign exchange reserves to a series of record highs, including at $365.749 billion on August 5.

Meanwhile shares in New Delhi-based automotive components maker Shriram Pistons & Rings Limited, closed at Rs. 2,306.15 on Friday, soaring six times from their listing price of Rs. 385 in June. The stock hit a record high of Rs. 2,972.80 on Tuesday.

Indian markets are closed on Monday for Independence Day holiday.

 The writer is a journalist based in India