CLSA is increasing India's weighting in its Asia Pacific ex-Japan portfolio by two percentage points as it sees a “realistic” chance of a new credit and investment cycle following Tuesday’s mega bank recapitalisation announcement.
“The failure to address the banking sector issue more proactively has been the one major piece of unfinished business in the Narendra Modi administration, now into its fourth year in power,” Christopher Wood, managing director of CLSA, wrote in in his weekly Greed & Fear report.
That vacuum should now be filled, which means it is now realistic to look forward to a new credit and investment cycle.Christopher Wood, MD, CLSA
The two percentage points increase for India will be paid for by reducing Korea’s weightage.
On the government’s Rs 2.11 lakh crore recapitalisation plan, Wood said that it was something he had “long been waiting” for. CLSA believes the allocation is sufficient to meet the requirement of India’s public sector banks.
Incidentally, the government’s announcement came less than a week after Wood highlighted this “urgent issue” of a hole in India’s banking system in the previous edition of Greed & Fear.
It remains unclear whether the recap bonds to be issued will be included in India's formal fiscal deficit, the report pointed out. It is a positive, however, that both rupee and government bonds have barely reacted to the announcement, despite the increased fiscal burden on the Centre, Wood added.