The Indian equity market has outperformed its emerging market (EM) peers over the past one month on the back of strong inflows from foreign institutional investors (FIIs).
The BSE benchmark, the Sensex, has gained more than 6% in dollar terms, with FIIs pumping in $2.4 billion over the last 25 sessions beginning February 12. Experts feel the general elections (April 7-May 12), coupled with improving macro-economic indicators, have made India more attractive as compared to its peers.
“Of late, the upcoming elections, offering the possibility of a democratic ‘refresh’ seemingly rare among EMs, have added to India’s relative attractiveness on macro parameters. We expect capital inflows to continue, driving mild currency strength and a drop in wholesale funding costs,” Credit Suisse analysts Neelkanth Mishra and Ravi Shankar said in a report.
Only Indonesia (5.41%) and Brazil (3.31%) among emerging market countries have given positive returns in dollar terms over the past one month.
FIIs, who are betting on BJP’s Narendra Modi to lead the next government at the Centre, are taking heart from the fact that 13 of 16 opinion polls since January 2013 have indicated that the BJP-led NDA will win the upcoming elections. In year-to-date, FIIs have bought $2 billion worth of Indian equities.
Meanwhile, concerns over QE tapering, Chinese slowdown and the Russia-Ukraine standoff have put other emerging markets under pressure. For the week ended March 19, the emerging market (EM) funds posted net outflows for a record 21st week at $4.1 billion.
Experts feel the resilience shown by the Indian rupee amid a currency sell-off seen in other emerging markets has been a source of comfort for the FIIs. “At a time when investors are worried about the effect of tapering on EM currencies, the Indian rupee has been remarkably stable and range-bound. India’s current account deficit (CAD) for the past six months has shrunk to $10 billion, approximately 1% of GDP, annualising to $20 billion per year. The reduction in CAD has been the most dramatic among EMs,” Credit Suisse analysts added.
The Indian rupee has appreciated 2.28% against the dollar since the US Fed cut its monthly bond-buying purchases to $65 billion on January 29, 2014. Over the past one month, the rupee has appreciated 1.83%.
However, analysts warn that risk-off sentiment towards other emerging markets can hit Indian equities. “The current rally could come under pressure as the possibility of BJP’s prime ministerial candidate Narendra Modi coming to power has already been priced into the markets. With US Fed further slowing down its pace of bond purchases, FII flows could dry up,” said UR Bhat, managing director, Dalton Capital Advisors. “The reward-risk balance for the Indian stock market is less favourable after the sharp run-up in prices of several domestic cyclical and PSU stocks in the past two weeks,” Kotak Institutional Securities added in a report.
On Wednesday, the US Fed decided to further slash its monthly bond-buying to $55 billion. The members of the Federal Open Market Committe (FOMC) on Wednesday said economic activity in the US slowed during the winter months, in part reflecting adverse weather conditions. However, labour market indicators on balance showed further improvement.