The sharp fall in the rupee, coupled with uncertainty surrounding India’s economic and corporate environment, has prompted two more foreign brokerages ? JPMorgan and Citi ? to revise their stance on Indian equity markets. JPMorgan downgraded India to ‘neutral’ (earlier ‘overweight’), while Citigroup reduced its December-2013 Sensex target to 18,900 (earlier 20,800) and, thus, joined foreign brokerages Goldman Sachs, UBS, Deutsche Bank, Nomura, and Morgan Stanley, which reduced their ratings and price target for Indian equities during the last one month.
In their research reports, both the US-based brokerages highlighted concerns around the sharp fall in the rupee that will have a negative impact on India’s balance of payments, corporate earnings and overall economic growth.
?Are we too late? We are certainly late in downgrading India. Our overweight case was less fiscal drag and a monetary stimulus leading to a modest cyclical acceleration in H2CY13. The move in the rupee has overwhelmed this. Policy options are limited,? said JPMorgan?s chief EM and Asian equity strategist, Adrian Mowat, further acknowledging the move was more reactive than proactive.
India’s domestic problems and high vulnerability to global events, such as the tapering of US stimulus or QE3, have forced foreign institutional investors (FIIs) to raise doubts over India’s growth story and forced them to change their view on the Indian equity markets. Incidentally, the Sensex has shed nearly 8% since the beginning of June. Over the same period, FII have pulled out over $2.5 billion from Indian equities after investing a record $15 billion during the first five months of the current calendar.
Meanwhile, Citigroup has said the measures to protect the rupee’s fall not only failed but also raised and inverted the yield curve and are stalling the funding market. ?R?s defense hurt the market and it might not be over yet, albeit such falls could offer some near-term bounces… Defenses down, risks up,? Citigroup India MD Aditya Narain stated in his report. The rupee has lost nearly 12% since the beginning of June.
In the report, Narain highlights that medium-term growth has been hit hard because of the monetary and fiscal problems that have resulted in a drop in corporate confidence. He, however, points out that writing off India may be not be right as the country has been in a similar economic situation several times in the past.
?India has been here before and fixed itself… India needs a policy/bottom-up pullback, some luck and time, and do not write it off. But currently, there is little to write home about,? Narain said.
