What’s Driving The Confidence In The Indian Markets?
A recent conversation between a local broker and me unfolded along these lines, with me asking the questions...
Q: Kya dila rahein ho, clients ko? (What are you making clients buy?)
A: XYZ, ABC, PQR. (Some scrips which I won’t mention here.)
Q: Market ka kya lagta hain? (What’s your feeling about the market?)
A: Girega toh nahin. (It will not fall.)
I found the answer, and the ensuing long conversation that followed, was very interesting. Interesting because, at most times in the conversation, a very seasoned sub-broker was extremely confident that things won’t go wrong. I asked myself whether there is merit to this confidence. As always, one can find both sides to the issue.
Confidence that the Reliance Industries Ltd. rally is here to last, confidence that expensive companies like Bajaj Finance Ltd. and Avenue Supermarts Ltd. will continue to deliver, confidence that the mutual fund inflows will continue and that this time, it really is different, and then some more confidence.
There are some macro factors working in India’s favour too, that are encouraging this confidence. India’s growth differential compared to China is slated to expand and reach the highest level by 2019, almost 150 basis points. This is no mean feat, and this might well ensure that India remains a favoured destination for a lot of global money managers. Remember, global exchange traded funds (ETFs) have pumped in over $5 billion into India over the last three years, and that is the highest number for any emerging market. BlackRock is on record saying that Indian is their favourite market in the Asian fixed income space. True, Indian equity market flows have paled in comparison to fixed income flows, but both of these show the strength of the destination that they are coming in to, or at least the relative strength.
The Indian rupee’s three-month implied volatility has slipped to the lowest levels since 2008, and forex reserves are at record highs.
Some other factors not looking bad include the monsoons, which have been consistent in July, with regions like Vidarbha and Marathawada, usually recipients of indifferent rain, having normal rainfall. Oil is not on the boil, and after the Goods and Services Tax and a few other major reforms, the expectations from the Monsoon Session of Parliament is next to negligible. The real fear is of the unknown, of what happens when the U.S. Federal Reserve’s balance sheet reduction starts and then starts showing its impact. But that is unknown, and a topic for another article. For now, we await Urijit Patel and the Monetary Policy Committee decision in August. From the Indian markets’ perspective, until August 2, among central bankers, Urijit Patel is more important than Janet Yellen.
Niraj Shah is Markets Editor at BloombergQuint.