Foreign investors optimistic on India riding on better economic outlook and PM Modi's return to power

Foreign portfolio investors from the US and Europe are optimistic on India, as reflected in their equity inflows that have recovered to USD 9.5 billion since March 2023, says a foreign brokerage report.

Swiss brokerage UBS Securities in a report, which is based on their meetings with over 50 American and European FPIs, said most are quite optimistic on India. Their equity inflows have recovered to USD 9.5 billion since March 2023, compared to a USD 4 billion outflow in the previous three months.

Another reason for the India optimism is the softening macro risks even as political continuity seems largely priced in.

The report further noted that most of these global investors have priced in Prime Minister Narendra Modi winning the upcoming general elections next summer and have already ignored the outcome of the many state elections due in the December quarter. UBS India economist Tanvee Gupta Jain said this optimism is in spite of the 4.6 per cent underperformance of the domestic markets versus the emerging markets so far this year.

According to UBS Securities India strategist Sunil Tirumalai, this optimism is driven by a perception of relatively better economic, political and geopolitical outlooks, but more importantly the reality of strong domestic inflows.

However, UBS has a cautious view on the country and its equity market given the rising bank rates which would force households to park money elsewhere from equities, coupled with the weak growth and return (RoE) expectations. Accordingly it has a lower target for the Nifty this year at 18,000, while the index is currently trading above this level.

Most FIIs agree that on-the-ground recovery remains uneven, whether looked in terms of the rural-urban dichotomy, manufacturing vs services growth or affluent vs lower-income household demand. The brokerage maintains their base case view that the economy may grow 6.2 per cent in FY24, as against 7.2 per cent in FY23.

On the benefits of how the "China plus 1" strategy, these investors were of the view that by way of shifting supply chains in the medium-to-long-term the country could emerge as a major beneficiary with the caveat that much of such gains would be dependent on India's ability to undertake structural reforms.

The macro benefits include the falling inflation which softened to a 25-month low of 4.25 per cent in May as against the peak of 7.4 per cent in September 2022; and the falling global commodity prices (especially crude oil) and hoped that supply-side measures can help contain price pressure as the El Niño risks remain.

The brokerage sees the current account deficit narrowing to 1.5 per cent in FY24 from 2 per cent in FY23, on lower energy prices and largely resilient services exports.

Another plus point is the commitment towards fiscal corrections despite the stretched government balance sheet by bringing down combined fiscal deficit to below 7.5 per cent of GDP by FY26 from 9.1 per cent in FY23.

On the monetary side, the brokerage expects the central bank to keep the rates on hold over the coming months before commencing a shallow easing cycle, likely from the March 2024 quarter, particularly if the US Fed pivots.

On the currency side, the RBI seems to have capped any significant rupee gains to rebuild its forex buffer to provide insurance against a potential global spillover. This buffer may open up some space for RBI to allow the rupee to make some gains later this year and expects the rupee to trade in the 81-83 range against the dollar.