Foreign Investors Made Large Bets On India, Betting On The Country’s Resiliency And PM Modi’s Return To Charge.
As reported by UBS, over fifty FIIs have shown optimism in India, resulting in a $9.5 billion recovery in stock flows since March 2023.
Most foreign financial institutions from the critical US and European markets have become optimistic about India, as seen by the volatile fortunes of equities flows to the Asian country.
As reported by UBS, over fifty FIIs have shown optimism in India, resulting in a $9.5 billion recovery in stock flows since March 2023.
This recovery follows a $4 billion outflow from India in the earlier three months as a result of China’s openness and unfavourable news about particular Indian corporate groupings.
India’s continued economic growth, among waning reopening tailwinds, came as a surprise. However, according to UBS, most FIIs agreed that the on-the-ground recovery remained unequal, whether measured on the basis of the rural-urban divide, manufacturing vs services development, or wealthy versus lower-income consumer demand.
India’s continued economic growth, amid waning reopening tailwinds, came as a surprise. However, most FIIs agreed that on-the-ground recovery remains uneven, particularly regarding the rural-urban divide. International investors have also heavily set in Prime Minister Modi achieving the forthcoming parliamentary elections in April/May 2024, while state elections in the December 2023 quarter are expected to have little impact, according to the bank.
Despite outperforming developing markets by 4.6% this year, India continues to operate at a 62% premium on a 12-month ahead price-to-earnings (PE) ratio, according to UBS.
According to Sunil Tirumalai, India strategist at UBS, this confidence is fueled by a view of improved economic, political, and geopolitical outlooks and robust domestic flows. Higher bank rates, on the other hand, are expected to cut down household flows. The analyst is also wary about India compared to other emerging markets due to very slow growth and low return on equity forecasts.
According to the UBS India Composite Economic Indicators, economic activity remained firm in April. On a seasonal-adjusted consecutive basis, the indicator increased 2% month on month in April (compared to 1.5% & 1.1% month on month in March & February). The high-frequency indicators available for May indicate that economic momentum was maintained.
During UBS’ roadshow, the potential advantages of India’s “China+1” policy were widely addressed.
According to the foreign bank, most of this potential increase in market share is based on India’s capacity to implement structural changes. The general consensus was that India may be one of the few emerging markets where expansion of more than 6% could be continued in the medium run.
In May, CPI inflation fell to 4.25%, thanks to a beneficial base effect and decreased food costs. According to UBS, headline CPI inflation will continue reasonable below 5% year on year in June before climbing in the September 2023 quarter. The foreign bank also forecasts CPI inflation to average 5.1% in FY24, down from 6.7% in FY23.
One of the key elements impacting India’s economic future is falling inflation, which fell to a 25-month low of 4.3%. While lowering global commodity prices, notably oil, was a welcome relief, UBS stated that given the possibility of El Niño, governments may intervene to manage price pressures, such as fuel price reduction and the release of rice and wheat reserves.
According to UBS, India’s FY24 current account deficit for the year will be comfortably below the expected sustainable range for the country’s CAD (between 2.1-2.3% of GDP).
Despite the government’s extended balance sheet, authorities are nevertheless committed to bringing the consolidated budget deficit down to less than 7.5% of GDP by FY26. It stated that higher-than-expected RBI dividends and strong GST collection might provide the government flexibility to increase spending in a pre-election year.
UBS maintains its view that the Reserve Bank of India (RBI) would hold interest rates constant in the next months before embarking on a gradual lowering cycle, possibly beginning in the March 2024 quarter. As a safeguard against global spillover, the RBI has restrained major appreciation of the Indian Rupee (INR) in order to rebuild its foreign exchange reserves. However, the RBI is expected to tolerate modest rupee rises later this year as its reserves create a sense of confidence. The UBS EM strategy team forecasts the rupee to move in the 81-83 range against the dollar this year, with a year-end projection of 79.
Conclusion.
Foreign institutional investors from the United States and Europe are becoming more optimistic about India. The improving economic, political, and geopolitical outlooks, and capacity to implement fundamental reforms, are stated to be driving the upbeat outlook. Despite a 4.6% drop in developing markets this year, India continues to trade at a 62% premium on a 12-month forward price-to-earnings (PE) ratio. Nonetheless, UBS remains cautious on comparison to other emerging markets due to very slow growth and low return on equity projections.
Proofread & Published by Naveenika Chauhan
