India Cuts Tax on Overseas Borrowing to Lure Capital Flows
Comment of the Day

September 21 2012

Commentary by David Fuller

India Cuts Tax on Overseas Borrowing to Lure Capital Flows

This business friendly announcement, reported by Bloomberg, helped to boost India's stock market today. Here is the opening:
India slashed taxes on overseas borrowings by local companies, stepping up a policy revamp to revive investment inflows. Stocks and the rupee climbed.

The so-called withholding tax, a levy on interest earned by overseas investors in foreign-currency bonds, loans issued by Indian companies was cut to 5 percent from 20 percent, the Finance Ministry said in a statement in New Delhi today. The reduction will be applicable for three years, effective July 1, according to the statement.

"Reduction in withholding tax will lower costs for companies, especially infrastructure borrowers, by up to two percentage points," Jayesh Mehta, the Mumbai-based managing director at the Indian unit of Bank of America Corp., said in a phone interview. "The measure will encourage more borrowings abroad by Indian companies."

Finance Minister Palaniappan Chidambaram is seeking to regain investor confidence and revive growth in Asia's third- largest economy. Today's measures follow government's decision last week to increase diesel prices to reduce its subsidy burden and allow foreign investment in industries including retail, aviation and power exchanges.

The rupee strengthened 1.8 percent to 53.4063 per dollar as of 3:57 p.m. in Mumbai, while the BSE India Sensitive Index rose 2.2 percent, the biggest gain among Asian benchmark stock indexes. The yield on the 10-year bonds due June 2022 rose to 8.17 percent from 8.16 percent earlier.

David Fuller's view As recently born-again activists, Prime Minister Manmohan Singh and his Finance Minister Palaniappan Chidambaram are determined to be either carried out on their shields by disgruntled former coalition partners and opposition politicians, or to stare them down and lead India's next GDP growth spurt, enabled by some overdue reforms. Plenty is at stake for India's investors, not to mention its teeming millions of hard working poor.

What about India's stock market which is often a barometer of prospects?

Back from the brink and then some is the short answer. The Nifty (weekly & daily) and Sensex (weekly & daily) Indices closed above their February highs today, so we now have an important higher high and a sequence of higher reaction lows. Breaks back beneath the now rising 200-day moving averages would be required to question scope for sideways to higher ranging in a further recovery towards the 2008 and 2010 highs, evident on these 10-year weekly log charts of the Nifty and Sensex. Crucially, the Bombay Banks Index (10-year log, weekly & daily) is also performing once again.

It is all down to governance and the sky is the limit if India can reignite its internally driven growth of the last decade. The challenges are mostly political and daunting but an optimistic outlook is not beyond reach.

Some of India's top companies are listed as ADRs. See Deepak Lalwani's India Report for a list. Other Indian listings, including funds, are also shown.


Most of my personal investments in India are via the sterling-denominated and London listed JPMorgan Indian Investment Trust (JII) (weekly & daily). This has lagged until recently, partly due to GBP/INR currency differentials which may now swing back in India's favour. JII (market cap £416 million) should have further catch-up potential and the discount to NAV is currently over 9%, according to Bloomberg. I also like Aberdeen's New India Investment Trust (NII) (weekly & daily) which is managed by Hugh Young. It also sells at a 9% discount to NAV but is thinly traded with a market cap of only £126 million.

Lastly, here is an informative article from the NYT and IHT: Skepticism and Caution Greet India's New Policy on Retailers.

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