Why foreign investors are bullish on India

Foreign investors have pumped in Rs 98,847.80 crore or $16.4 billion in the Indian equity markets this year, as of December 22. And they continue to invest.

“In our view, Indian equities appear attractive from almost every angle,” a report by Credit Suisse, a brokerage firm, said.

Here are six reasons why FIIs are bullish about India:

1. Strong currency: “India has the second cheapest currency on our scorecard, and the rupee seems to be significantly undervalued relative to the export market share of India (which we take to be a proxy on competitiveness),” the CS report said. This means a lot of investors are expected to increase their investments in the Indian currency. This is good news for the currency, which was one of the worst performers in 2013. In 2014, it has outperformed every other emerging market or Asian currency.

2.Current account deficit: The stock markets are a reflection of the underlying economy. When economic factors improve, stock markets automatically rise. One such factor is the current account deficit – the amount India owes to the world in foreign currency. The higher the deficit, the more the currency depreciates. This stokes inflation – the rise in prices over time. India’s CAD widened to a life-time high of 4.7% of the Gross Domestic Product (GDP) – a measure of the economy. This is expected to fall to 1.5% of GDP in 2015, the report suggested. “Above all, we find that opening up investments for foreigners will allow FDI to rise from 1.1% of GDP and in turn a basic balance of payments surplus to be maintained,” the CS report said. This means India’s fundamentals are going to be stronger here on. This is good news for the stock markets.

3.Reform agenda: “India seems to have the most stimulating reform programme within emerging market,” the CS report said. The Narendra Modi-led BJP government has already announced a slew of reforms in the six months in power. Some of these reforms include changes to the labour laws, diesel deregulation, and simplification of land acquisition rules and so on. These help improve overall environment for companies to operation. “The BJP has recently won two Indian states; our strategist believes that within a year it could be controlling half of the states and then on the back of this, could impose more radical reform, including a possible nationwide goods and service Tax in 2017, privatisation and de-regulation, especially of the energy sector,” the CS report said. Stock markets always cheer reforms, especially those that help companies operate efficiently.

4.RBI action: It is not just the government that analysts are impressed about, but even the Reserve Bank of India. “India also seems to have the most extensive central bank reform programme,” the report said. The central bank has been actively tracking inflation. It recently announced that it would target to bring retail inflation down to 6%. Until now, it had only been concentrating on bringing down producer-side inflation. This has received thumbs up from many analysts and experts. The RBI also concentrates on extending banking services across the country. It recently announced new banking licences and the set up of small banks to open up the rural economy and limit corruption.

5. Global oil prices: India is one of the largest net importers of commodities like oil and gold. Prices of oil in the international markets fell nearly $50 this year to around $60/barrel levels. Countries, who export oil, have been the worst affected from this drop. India, on the other hand, stands to benefit from this fall the most after South Korea. This is one of the biggest reasons for a fall in inflation in India. The country is also not affected by any slowdown in China or Japan, unlike Korea. This makes it a preferred investment destination for many foreign investors.

6.Economic growth: Most experts and analysts are bullish about India’s capacity for growth. It is one of the strongest growth dynamics, the CS report said. A majority of India’s population is young. This means productivity and consumer demand can remain high for a long time. This can help fuel growth. Currently, Indian productivity per hour is just 42% that of China, according to Credit Suisse. Despite that India is growing at 5% rate. So, any increase in productivity would only serve to speed up economic growth. As the economy grows, investors in the stock market stand to gain.