Investors have grown disillusioned with India. Deteriorating corporate profitability, a depreciating currency and concerns that momentum on reform was slower than had been expected have contributed to a reversal of investors’ previous optimism on investment prospects. After foreign investors brought in more than USD60bn over an 18-month period from late 2013 to early 2015, flows have reversed since May last year.
While these concerns are valid, sentiment may now have turned too negative. In the near-term, we see little reason to expect a significant decline in the trend growth rate of about 7% on real GDP even though fiscal and monetary policies are unlikely to provide much more support to growth from here. Unless inflation rises sharply and unexpectedly, consumption is likely to remain strong enough to support this rate of growth and we think it is reasonable to expect the improvement in investment conditions to yield an increase in investment growth. For that reason, we see growth rising modestly over the next few years.
Will this be “Chinese-style” double-digit growth? Probably not. India faces some constraints on growth that China didn’t, and not (just) because it is a democracy. Its banking system is unlikely to be able to grow fast enough, the government itself is not in a position to provide the investment needed and the global backdrop is less supportive with slower growth and a rising protectionist tide than China faced.
But India’s demographic profile lends a certain inevitability to growth being sustained at a high rate for a prolonged period as long as the government does not stand in the way. Since the government is committed to doing the opposite, to facilitating private investment by opening up the economy and improving the business climate, we remain fundamentally optimistic on India’s medium- and long-term prospects.
Here is a link to the full report.
India’s RBI has been building reserves which amounts to selling the Rupee. This has acted as a headwind to foreign investors and as the above report highlights people are getting impatient with the pace of reform and the removal of impediments to economic expansion.
The Dollar pulled back sharply against the Rupee last week and a process of mean reversion is underway. However it would need to break the progression of higher reaction lows to question Dollar dominance over the medium term.
Both the Nifty Index and the Bombay Banks Index posted large upside weekly key reversals last week and held the majority of those gains this week. Both are engaged in reversionary rallies and will need to sustain moves above their respective trend mean to confirm more than short-term steadying.
Elsewhere in Asia, the Hong Kong listed China Enterprises Index (H-Share) found support this week near the upper side of the short-term range and reversionary rally also remains in place. (I also continue to hold a position in the Index which has been trying until very recently).