India's Market Resilience: A Key Positive for Foreign Investors
Christopher Wood, Global Head of Equity Strategy at Jefferies, discusses the implications of the US Federal Reserve's 50 bps rate cut on India's market and the potential for foreign investors to increase their positions in the country.
IndiaMarketRbiFederal ReserveInterest RatesForeign InvestorsDomestic FlowsCapex CycleReal EstateReal Estate NewsSep 21, 2024
The hot areas of the market in India have been areas like industrials, infrastructure, real estate, energy, and defence. These are the areas, which have been driving the market. However, foreign investors have been underweight in India due to high valuations and the lack of ADRs quoted offshore.
Wood expects that the RBI will likely reduce rates once before the end of the year, given its recent counter-cyclical stance and preemptive regulatory actions concerning the banking sector. However, he believes that the RBI will differ from the Federal Reserve by adopting a more cautious approach.
Regarding the US Federal Reserve, Wood observes that it recently cut its benchmark interest rate by 50 basis points (bps). He speculates that the Fed's neutral rate is probably between 3% and 3.5%. Even if the US economy achieves a soft landing, Wood predicts that the rate will likely be within this range by mid-next year, though he was surprised by the magnitude of the recent rate cut.
The Fed's decision to cut rates by 50 bps was contrary to the messaging going into the meeting, which suggested that the economy is okay and the employment market is weakening, but only gradually. Wood believes that the motivating factor behind the rate cut was political, as the Fed would prefer Donald Trump not to be re-elected.
In the case of India, the RBI can cut rates, but Wood believes that the RBI is not going to be aggressively cutting. The RBI is going to behave in a different way from the Fed. The RBI, in recent months, has been counter-cyclical, because they have been doing these preemptive regulatory measures as regards the banking system.
The RBI will be coming under criticism if they haven't cut rates by the end of the year, because if you look at the level of inflation, particularly core inflation, is below the level rate. So you have positive real rates. But, with a stock market at all-time highs, huge domestic flows getting to the stock market, the RBI doesn't feel massive pressure to cut rates today.
The big story of India this year is these domestic flows. Indian households have become convinced that India is a good long-term equity story and don't want to be scared out of the market. The only explanation is that the domestic households who are investing through these monthly installment plans have become convinced, in my view correctly, that India is a good long-term equity story and don't want to be scared out of the market.
However, foreign investors have been underweight in India due to high valuations and the lack of ADRs quoted offshore. The neutral benchmark weighting of India has just gone up a lot which falsely has made them become underweight by market performance.
The good news about this is that any major correction in India, like 10%, in my view, will be viewed by foreigners as the opportunity they have been waiting for to add. The foreign ownership is declining relative to domestic ownership. Fundamentally, this domestic flows are just extremely positive and we estimate Indian households have 6% of their assets in equities.
The best evidence we were in the early days of a capex cycle, a year ago, 15 months ago, was that capex stocks were rallying. But there was no actual data. But now there is real data highlighting that the private sector capex cycle is underway.
The residential property story, which we have been very bullish on, has been dramatic here and if there is a weakness it is very much focused on what they call the high-end. What I am saying - if you are going to criticise it, you will say it is very vulnerable because it is just the high-end going up. But I would say in the response - I would have to admit that is true. I would say that is how property cycles work. They start with the high-end and they gradually trickle down and in that sense rate cuts would help because if you go under $2,00,000 for a unit, you are probably going to get to levels of more rate-sensitive buyers, and so if rates go down 200 bps here or 150 bps, that is going to increase the number of people who can afford it.
Frequently Asked Questions
What is the current state of India's market?
India's market is currently resilient, with domestic flows driving the market. However, foreign investors have been underweight in India due to high valuations and the lack of ADRs quoted offshore.
What is the RBI's stance on interest rates?
The RBI is likely to reduce rates once before the end of the year, given its recent counter-cyclical stance and preemptive regulatory actions concerning the banking sector. However, the RBI will differ from the Federal Reserve by adopting a more cautious approach.
What is the impact of the US Federal Reserve's 50 bps rate cut on India's market?
The US Federal Reserve's 50 bps rate cut is likely to have a positive impact on India's market, as it will lead to a decrease in interest rates and an increase in liquidity. However, the impact will be limited due to India's high valuations and the lack of ADRs quoted offshore.
What is the outlook for foreign investors in India?
Foreign investors have been underweight in India due to high valuations and the lack of ADRs quoted offshore. However, any major correction in India, like 10%, will be viewed by foreigners as the opportunity they have been waiting for to add.
What is the current state of India's capex cycle?
The private sector capex cycle is underway, with real data highlighting the increase in capex. The best evidence of this is the rallying of capex stocks.
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