What a difference a few months have made for Indian markets.
The rupee is 8 percent up from last summer’s record lows. Foreigners have ploughed $17 billion into Indian stocks and bonds since Sept 2012 and foreign ownership of Indian shares is at a record high 22.7 percent, Morgan Stanley reckons. And all it has taken to change the mood has been the announcement of a few reforms (allowing foreign direct investment into retail, some fuel and rail price hikes and raising FDI limits in some sectors). A controversial double taxation law has been pushed back. The government has sold some stakes in state-run companies (it offloaded 10 percent of Oil India last week, netting $585 million). If the measures continue, the central bank may cut interest rates further.
Above all, there have been promises-a-plenty on fiscal consolidation.
The promises are not new. Only this time, investors appear to believe Finance Minister P. Chidambaram.
Chidambaram who was on a four-city roadshow to promote India to investors, pledged in a Reuters interview last week not to cross the “red line” of a 5.3 percent deficit for this year in the Feb 28 budget. Standard Chartered, one of the banks that organised Chidambaram’s roadshow, sent out a note entitled: “The finance minister means business”.
FM Chidambaram has gained market credibility on back of measures announced since Sept. 2012. ..if he follows through on these pledges….markets will have more reason to cheer.
So what can be expected if the budget does deliver the goods? Assuming global central banks continue to gush liquidity, the Indian stock rally might continue. Indian stocks trade at 16 times forward earnings, slightly below their historical averages. The rupee too should rise further. It has an implied yield of around 6 percent, one of the highest in the world. And unlike many other emerging markets, India won’t be averse to some appreciation from current levels of around 53. 15 per dollar. According to Arvind Mayaram, head of economic affairs at India’s finance ministry: