Global Capital Inflows Pour Into India as PM Modi Engages with Elon Musk and Ray Dalio
A decline in the country's current account deficit, supported by lower oil prices and growing services exports, is boosting confidence in the currency.
Prime Minister Narendra Modi's visit to the United States comes at an opportune moment. With a thriving economy, record-high equity benchmarks, and a rapidly expanding consumer market, India presents an enticing opportunity for American corporate executives and investors.
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Since March, India has attracted a net inflow of $8.7 billion in foreign investments, set to be the highest quarterly amount since the end of 2020. Rupee-denominated bonds are experiencing an extended period of monthly purchases by overseas funds, the longest streak in nearly four years. Furthermore, the Indian currency offers the second-best carry returns in Asia this year, according to Bank of America.
PM Modi's visit holds even more promise: Tesla Inc. is expected to make a substantial investment in India, as confirmed by CEO Elon Musk after his meeting with PM Modi. Additionally, PM Modi urged Ray Dalio, the founder of Bridgewater Associates, to deepen investments in the country. During the visit, General Electric Co. and Hindustan Aeronautics are also anticipated to sign an agreement for the production of engines for India's fighter jets.
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"Investors agree that India is currently experiencing a 'Goldilocks' phase," wrote Samiran Chakraborty and Baqar Zaidi, economists at Citigroup Inc., following meetings with equity and fixed-income investors in London.
The surge of foreign capital and the retail-investing boom driven by the pandemic have propelled the benchmark NSE Nifty 50 Index to all-time highs, with a nearly 9% increase this quarter.
Although this has led to elevated stock valuations compared to historical levels and increased premiums relative to emerging-market peers, investors remain enthusiastic due to the country's steady economic and earnings growth, political stability, and supportive monetary policies.
These favorable attributes distinguish India, home to 1.4 billion people, in a global economy facing slowdown, further enhanced by China's sluggish post-pandemic recovery and its geopolitical tensions with Western nations.
Citi economists noted that investors seem inclined to maintain their long-term positions in India, despite rich valuations, as there are no immediate concerns about a reversal of portfolio flows.
UBS Global Wealth Management and Societe Generale recently upgraded their India outlook, reflecting the positive sentiment.
However, there are potential risks on the horizon. A delayed onset of monsoon rains, crucial for inflation and economic growth, could impede India's consumption recovery. Additionally, a rapid rebound in China, where equity valuations have become increasingly attractive to some fund managers, may negatively impact Indian stocks, which have been positioned as key beneficiaries of the shift away from China.
Regarding bonds and the Indian rupee, investors are taking advantage of high yields in local-currency Indian debt, anticipating a rate pause by the central bank until early next year. Foreign buying has concentrated on government bonds eligible for index inclusion, with JPMorgan Chase & Co's review expected later this year.
The yield on the benchmark 10-year bond has declined approximately 40 basis points from its peak in March, supported by easing inflation and a surprising policy pause by the Reserve Bank of India in April.
"Year-to-date, the market has smoothly absorbed supply due to moderating inflation and expectations of a peak in India's policy rate," noted Standard Chartered Plc strategists, including Nagaraj Kulkarni, in a report. "We maintain our positive outlook."
The Indian rupee has performed well this year, trailing only the Indonesian rupiah. The nation's current account deficit has significantly decreased due to lower crude oil prices and increased services exports, bolstering confidence in the currency.
Furthermore, dollar bonds issued by Indian corporations are outperforming their regional counterparts. Improved financial conditions of companies, coupled with historically low non-performing asset ratios in banks, have increased the appeal of corporate debt. Despite China's high-yield debt experiencing a loss of 9.1%, India's junk bonds have provided investors with a 5.3% return this quarter.
Mitul Kotecha, Head of Emerging Markets Strategy at TD Securities, emphasized, "Clearly, India's favorable growth prospects, relatively younger population, as well as the increasing trend toward a China+1 strategy has helped to attract investment overall." Kotecha anticipates the trend of foreign bond purchases to continue in the second half of the year.
This paraphrased content is based on an original article published on NDTV.com. The factual and statistical information from the original article has been retained and presented in a paraphrased form.
