Rebounding foreign portfolio inflows and robust domestic funds propelled Indian benchmark stock indices to their highest close in almost five months, and the upbeat trend should hold course amid rising expectations for quick recovery from the slowdown in economic expansion that was caused by shock removal of a large chunk of bank notes.
Net foreign portfolio purchases on Friday were about $1.2 billion, according to data from the National Stock Exchange, taking the total for the month to $1.5 billion.
Money managers are drawing strength from corporate earnings that mostly beat or matched market expectations for the December quarter, when the November 8 decision to invalidate high-value notes that comprised a staggering 86 per cent of the currency in circulation triggered a severe cash crunch and dealt a big blow to consumer spending, the lifeline for selling most products in India.
The pace of economic growth was dented by New Delhi’s move to flush out tax-dodged cash holdings — with many economists forecasting the GDP growth rate to slow to around 6.5 per cent from expected 7.7 per cent for the financial year ending on March 31. But with the supply of new bank notes increasing at a fast clip the situation is changing for the better.
“Almost everyone agrees that the impact is going to be a sharp ‘V’, that we would have a downgrade of growth for a short period of time,” Reserve Bank of India Governor Urjit Patel told CNBC-TV18 in a rare interview. “However, the remonetisation has happened at a fast pace and that was part of the plan.”
The central bank is convinced the $2 trillion Indian economy, the third largest in Asia after China and Japan, will rebound in the new financial year that begins on April 1, and it has shifted its monetary policy stance to “neutral” from “accommodative” citing inflation as a worry in coming months — even as consumer price rise in January stood at 3.17 per cent, the slowest since January 2012 when the current index series was launched.
The probability of inflation picking up was strong, with core inflation — excluding volatile food and fuel prices — remaining firm at 5.1 per cent. This also reflects robust underlying demand and manufacturers such as car makers were able to raise prices in January. In other words, the outlook has improved for better corporate profitability.
Waiting in the wings
Foreign funds had pulled out about $4 billion from Indian stocks and debt in the past quarter, largely in line with world trends after Donald Trump’s unexpected victory in US elections and to some extent concerns caused by the demonetisation drive. However, it was only a matter of time for global investors to resume scooping up Indian securities because of the opportunity the country possesses with a massive domestic market in a world swinging to protectionist tendencies.
This was evident on Friday when the central bank allowed foreign portfolio investors to resume buying stock in HDFC Bank after their holding dropped more than two percentage points below the threshold 74 per cent. In a frenzy the cap was breached in a few hours, showing that given the right opportunity there would no dearth in foreign appetite.
Shares in HDFC Bank rocketed as much as 9.5 per cent to all-time high of Rs. 1,454 before easing off to close at Rs. 1,375, still up 3.6 per cent on the day. Traders knew funds would fill in the gap in quick time.
“This is an opportunity for foreign investors to buy the stock on local line, which is likely to last for a very short period of time. Fundamentally, there is no change in our view on the stock and we remain “overweight”, Morgan Stanley equity analyst Anil Agarwal said.
Bank shares, including that of state-controlled lenders, are back in favour as investors believe the worst of the bad loan crisis is behind them. The Nifty Bank Index hit an all-time high of 21,042.35 on Friday before closing at 20,551.35, up 5.3 per cent this month.
The top-30 Sensex closed at 28,468.75 and the 50-share Nifty ended at 8,821.70, both extending their run of weekly gains to four in a row.
On Monday, the board of Tata Consultancy Services, India’s biggest software services company, is scheduled to consider a share buy-back proposal. Analysts expect the company, which has cash reserves of more than $6 billion, to spend $2 billion on the buy-back.
This will pile pressure on rival Infosys Ltd, which has $5.1 billion in cash, to consider a buy-back.
Riding the wave
Although the sudden scrapping of Rs. 1,000 and Rs. 500 currency notes caused much hardships to people across the country, the move to cleanse the system of unaccounted money could provide many positives in the longer run.
A good chunk of the “black money”, or tax-dodged cash, could come into the formal economy, giving a thrust to development.
There will be more money in the system, a wider tax base, lower interest rates, greater transparency and cost reductions, HDFC Bank Managing Director Aditya Puri told a conference. “Demonetisation is being demonised for nothing,” he said.
“This is perhaps the biggest demonetisation drive in the world that was aimed at striking at the very root of corruption, black money and counterfeit currency,” Finance Minister Arun Jaitley said.
“Normality has been restored within few weeks and there is no shortage (of bank notes) in the market for even a day,” he said, retorting several opposition lawmakers’ argument it would take several months for the crisis to blow over.
Smart investors are sure to ride the wave as the economy picks up steam. The Reserve Bank expects growth to accelerate to 7.4 per cent in 2017-18 from its watered down projection of 6.9 per cent for the current financial year.
Morgan Stanley said in a report on Friday that it expects shares in IndusInd Bank, controlled by billionaire non-resident Indian group Hindujas, to double in three years. The bank has expanded from being largely a vehicle financier to having a comprehensive product portfolio across retail and corporate segments, similar to other large private-sector banks, since CEO Ramesh Sobti and his team came on board in 2007-08, it said.
The brokerage expects low-cost deposits to rise as the mid-cap bank benefits from increasing dominance in home markets and higher cross-sell with vehicle finance/rural customers. By 2020, it should become a mega-cap bank.
It set a target price of Rs. 1,600 for the stock, with an overweight stance, say that earnings growth should accelerate and sustain premium valuations. The share closed at Rs. 1,331.10 on Friday.
Edelweiss Securities is upbeat on metal maker Hindalco Industries and has set a target price of Rs. 229, compared with the closing of Rs. 183.40.
“We believe that Hindalco will continue to benefit from progressively higher captive coal, product mix refinement and deleveraging,” the brokerage said in a note to its clients.
“We expect to see further EBITDA growth in Hindalco with relatively lower investments as compared to hot metal as the company puts up downstream facilities. We are also upbeat on management’s focus on deleveraging balance sheet.”
Brokerage Sharekhan is bullish on motorcycle maker Hero MotoCorp as it sees sales volumes picking up in 2017-18. Controls on costs and price increases undertaken by the company should help maintain its operating margins. It has a price target of Rs. 3,670 against Friday’s closing of Rs. 3,089.
The writer is a journalist based in India.