Analysis: Investors Strive to Look Beyond India’s COVID-19 Crisis
Indian financial markets have struggled this month as the world’s worst COVID-19 crisis engulfs the country, but international investors are betting the economy will rebound quickly once the pandemic has passed.
Data shows more foreign investment money left India this month than in the entire first quarter, as a catastrophic spike in deaths leaves the world’s second most populous country in turmoil. Read more
Before the upsurge, the International Monetary Fund, banks and rating agencies all predicted an impressive rebound in double-digit growth this year, but many of those forecasts will now have to be revised downwards.
Indian economists at JPMorgan have cut their second-quarter GDP estimates to -16% qoq from seasonally adjusted 6.5% and still see the risks of a bigger stumble if the health crisis continues unabated.
Citi sees a “significant” chance of also having to revise its forecast downwards, while rating agency Fitch estimates that the government’s budget deficit will almost double to 14% of GDP this year and push the debt-to-GDP ratio from India to more than 90%.
“It’s a really sad situation,” said Kiran Kowshik, emerging market currency strategist at Lombard Odier, adding that the crisis was made worse by the weakness of India’s health system and the fact that many workers in the informal sectors have to to be able to travel to earn a living. .
The Indian rupee was one of the worst performing heavy currencies in the world this month, falling almost 2%.
Including the sale in the bond market, Societe Generale estimates that international investors withdrew more than $ 6 billion from India in April.
But with new targeted lockdowns, the government curbing vaccine exports, and ventilators and other supporters now arriving from overseas, Mumbai’s $ 2.4 trillion Sensex stock index (.BSENS) has gained ground and the rupee is heading for its best week since August.
“Prime Minister Modi, and the partial structural reform he represents for investors, is neither politically vulnerable enough, nor Indian stocks expensive enough compared to history, to throw in the towel on what remains. best choice of countries in large emerging markets, ”said Hasnain Malik, head of equity research at Tellimer.
The $ 600 billion in foreign exchange reserves the central bank has built up are meanwhile expected to cushion any capital outflows, and unlike last year, credit rating agencies have remained on the sidelines of the deterioration in the stock market. India’s rating, which would take it out of the investment grade.
Although Fitch has warned of increasing debt and the likelihood that already weak state banks will need more help, he still believes the economy could grow 12.8% this fiscal year. – which runs from March to March – after falling by almost 8% last year. Read more
“The problem with India is that the government deficits and debt are high, but they are held almost exclusively at the national level and the country has a very good track record of growth,” said one of the top analysts. Sovereigns of S&P Global, Frank Gill.
Lombard Odier’s Kowshik points out that this month’s stock market crash comes after $ 36 billion was invested in Indian stocks between September and March.
Aviva head for Asia and Global Emerging Markets Alistair Way said his company is reluctantly considering some battered Indian stocks again, while others see stimulus for the country’s nascent domestic bond market.
The central bank has embarked on quantitative easing and authorities are hopeful that influential investment index providers like JPMorgan and Bloomberg will soon include India, one of the only investment grade-rated countries still not in the list. these benchmarks. Read more
Foreigners only hold 2% of Indian government debt, roughly compared to 20% to 40% in neighboring Indonesia and Malaysia, but the inclusion of an index could quickly change that.
The government has already relaxed strict foreign ownership limits that had been a big obstacle to inclusion. Analysts say he’s also likely to need to be part of Euroclear’s key ecosystem where buying and selling bonds are easier.
“The stars are lining up now (for inclusion in the index)” said Abhishek Kumar, managing director of State Street Global Advisors, who estimates that the local Indian bond market would eventually accumulate the maximum weighting of 10% allowed on the JPMorgan’s $ 200 billion to $ 300 billion GBI-EM index.
The $ 20 billion to $ 30 billion that could yield over time “would go a long way to financing the budget deficit related to COVID this year,” he said.
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