Opinion: Global investors’ love affair with India is about to be tested

“If something cannot go on forever, it will stop.” This statement by Herbert Stein, a former chairman of the US Council of Economic Advisers, referred to America’s rising public debt. However, it is equally applicable, if not more so, to surging asset prices.

If there is one market that is putting Stein’s law to the test, it is Indian stocks. On September 15, the Nifty 50 and BSE Sensex indices hit fresh all-time highs. Since the start of this year, Indian equities have risen nearly 9 per cent, compared with an almost 1 per cent decline for the broader emerging market index.
This puts Indian shares on course for their eighth straight year of gains. While global investors continue to sell down their holdings of Chinese stocks, they have purchased US$15.8 billion of Indian equities since the start of this year, data from JPMorgan shows. Morgan Stanley predicts that India’s stock market – currently the world’s fifth largest – will be the third biggest by the end of this decade.

This is questionable. What is clear is that India is ticking many of the boxes that matter to international investors. Not only is it the world’s fastest-growing major economy – it expanded at an annualised rate of 7.8 per cent in the second quarter, powered by the service sector – it boasts strong corporate earnings driven by a long-awaited pickup in private investment.

Just as importantly, Asia’s third-largest economy is the leading beneficiary of the sharp deterioration in sentiment towards China over the past several years. Although Indian stocks were already surging before Chinese shares peaked in early 2021, the rally has been turbocharged by the succession of policy shocks in China.

However, the most striking thing about Indian markets is that they have become Teflon-like. Nothing that is thrown at them – the dramatic increase in United States interest rates and the sharp rally in the dollar, the global downturn, the surge in food inflation in India, the renewed rise in oil prices, and the allegations of fraud and stock market manipulation against Adani Group – seems to stick.


World’s largest population: why it could be a headache for India

World’s largest population: why it could be a headache for India

India has also had luck on its side. China’s post-Covid-19 recovery faltered, delaying the rotation of funds out of China into India. Furthermore, Chinese President Xi Jinping did not show up at this month’s G20 summit hosted by India. This gave Indian Prime Minister Narendra Modi a freer hand to champion New Delhi’s aspirations for global leadership, strengthened by the country’s role as a pro-Western counterweight to China.

Yet, the more interest there is in India on the part of global investors, the greater the scrutiny of its economy and markets. Last week, JPMorgan announced that it will add India to its widely followed index of emerging market local currency bonds, setting the stage for billions of dollars of foreign inflows that will help the government finance its fiscal and current account deficits.

While India’s inclusion in the index will be phased over a period of 10 months, starting in June 2024, its weighting is expected to eventually reach the maximum allowed – 10 per cent – on a par with China’s current weight. JPMorgan anticipates US$15 billion to US$20 billion of inflows over a 10-month period, which would be almost as much as the current level of overseas holdings of Indian domestic bonds.

Troubled China-India relationship means Asian century remains elusive

This is good news for foreign investors seeking more exposure to one of Asia’s largest sovereign debt markets. It is also a victory for Indian technocrats who have been pushing for index inclusion for years. On the other hand, it will test both India’s willingness to open up to more foreign capital at a time when markets are vulnerable, and investors’ tolerance of macroeconomic risks in India.

Unlike in some other emerging markets, notably Malaysia and South Africa, foreign ownership of local government bonds in India is very low, currently standing at just 2 per cent of outstanding debt.

Supporters shower Indian Prime Minister Narendra Modi with flower petals as he arrives at the headquarters of the Bharatiya Janata Party in New Delhi on September 13, following the success of the G20 summit in India. Photo: AP

Indian politicians have long been wary of “hot money” flows that could destabilise the economy. They have also been reluctant to cede more control over policy to so-called “bond vigilantes” who force profligate governments to impose austerity by driving up their borrowing costs sharply.

Index inclusion will subject India’s economy and markets to greater scrutiny and stricter governance standards. With a fiscal deficit of nearly 9 per cent of GDP – the biggest among the members of JPMorgan’s emerging market bond index – and a much higher public debt burden than in other countries with the same credit rating, India’s relationship with global debt investors is likely to become more tense.

Yet, this is part and parcel of playing a bigger role in the global economy and markets. The question is whether index inclusion will encourage India to come up with a more credible fiscal consolidation plan.

On Wednesday, Fitch Ratings noted that there are examples of countries that joined global bond and equity indices and ended up pursuing “policies that had clear adverse effects on foreign investor confidence”. China is a prime example.

Fortunately for India, its appeal in the eyes of global investors partly stems from its position as a compelling alternative to China. However, both countries remain suspicious of foreign capital. The difference is that India has sentiment firmly on its side, for now at least.

Nicholas Spiro is a partner at Lauressa Advisory

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button