Abundant cash is helping Indian shares ride out gloomy economic data and resume their rally as fund managers seem to be confident that structural changes underway in the economy would provide a firmer foundation for the pace of growth to accelerate.
The top-30 Sensex galloped 1.8 per cent over five trading days to 32,272.61, posting the widely tracked benchmark’s biggest weekly gain in nearly two months. The 50-share Nifty rose 1.5 per cent to 10,085.40.
The rally, in the face of a sharp slowdown in economic expansion and an uptick in inflation, showed it was the longer term outlook that investors were focusing on. Many brokerages are downgrading their earnings forecasts for companies because of the lower-than-expected pace of GDP growth, but this has had no impact on the bullish fervour.
India’s $1.3 trillion economy, Asia’s third largest after China and Japan, expanded 5.7 per cent in the June quarter, the slowest pace since early 2014, as one-time events such as last November’s demonetisation and the launch of a national sales tax disrupted business activity. Normality is expected to return by the coming quarter.
“The headwinds that hobbled the economy are a passing phase,” said equity salesman Anmol Bhushan. “The massive state investment in large infrastructure projects across the country is bound to have a ripple effect on growth as we move ahead.”
Strategists, including those at ING and National Australia Bank, believe that Prime Minister Narendra Modi has the political mandate to push policy initiatives to revive growth.
On Thursday, he played host to Japanese Prime Minister Shinzo Abe to kick off work on a $17 billion bullet train project — the country’s first such venture — between Ahmedabad in Gujarat and the financial hub of Mumbai in Maharashtra. The 508-kilometre high-speed rail line, funded 81 per cent by Japan, is expected to be completed by 2022.
Boost for BHEL
The bullet train project should provide a lifeline to state-controlled Bharat Heavy Electricals Ltd (BHEL), which had been facing a sharp slowdown in new orders even though its backlog stood at a comfortable Rs. 1 trillion.
Shares in BHEL leapt as much as 10 per cent to their highest in more than a month after Abe said the Indian company would partner with Kawasaki Heavy Industries Ltd to make the coaches for the high-speed trains.
“If Japan’s high-end technology and India’s capable human resources partner, then India can become the factory of the world,” Abe said.
A joint statement issued by Kawasaki, which manufactures the Shinkansen bullet trains as well as other metro coaches, and BHEL said their joint venture would look at other train networks too.
“Both sides will explore further strengthening of partnership in high-speed railways. They also recognised that there is potential for further collaboration between India and Japan in the modernisation and expansion of the conventional railway system and the construction of metro rails in India,” the statement added.
For BHEL, which saw new order signings fall 41 per cent in the first quarter to Rs. 18 billion, compared with the same period a year earlier, the high-speed train network would breathe new life at a time when its traditional clients like power projects are going through a slowdown.
Record forex reserves
Capital flows into India have remained robust through the year, buoyed by opportunities and better returns the country offered. The stock market, which hit all-time highs in early August, has gained about 50 per cent since the start of January. Foreign direct investment as well as portfolio inflows and other flows are rising.
Overseas funds have bought Indian bonds worth more than $20 billion and moved $6.5 billion into equities so far this year. Foreign direct investment reached $60 billion in the financial year ended March 2017, making the country one of the largest recipients. In April-June, net FDI inflow stood at $7.2 billion, almost double from the same period a year ago. Remittances by expatriate Indians rose 5.3 per cent to $16.1 billion in April-June.
India’s foreign exchange reserves rose by $2.6 billion in the week to September 8, taking the total past $400 billion for the first time ever to $400.7 billion. In the previous week, the reserves had soared by $3.6 billion. The pace of accretion has been one of the strongest within Asia over the past 12 months, according to analysts at Morgan Stanley.
A large slice of the inflows is absorbed by the central bank to keep a rein on the rupee, which has strengthened about six per cent this year against the dollar. A firmer rupee is a millstone around the neck of exporters, knocking down their competitiveness, but gives foreign portfolio investors an unexpected bonanza.
This is because large funds investing in Indian shares or bonds usually work their return calculations based on currency losses, or depreciation of the rupee.
The record reserves should provide the central bank a big buffer to combat volatility in the rupee, especially when Western nations begin to roll back quantitative easing.
The rupee, which closed at around $64 to the dollar on Friday, is expected to strengthen towards $62 by next March, according to market pundits.
“India is one of the best placed in the emerging market space,” Julian Wee, a senior market strategist at National Australia Bank in Singapore, told financial news agency Bloomberg. “Politically, there is little risk. Its fundamentals are also pretty strong. The US dollar remains weak overall, and the rupee still retains a large interest-rate differential buffer against it.”
The writer is a journalist based in India.
