India’s domestic growth momentum and improving capital flows could provide support to the Indian markets in the coming months, even as foreign investors’ overall equity exposure remains weak, according to a Jefferies research report.
Jefferies noted that India recorded net foreign buying of US$2.45 billion in equities in July, helped by an unwind of the memory trade. However, foreign investors remained net sellers of Indian equities to the tune of US$25.4 billion year-to-date, highlighting continued pressure from overseas flows.
The report said the more encouraging signal is coming from the domestic economy, with bank credit growth accelerating to 17-18 per cent year-on-year, the highest level in more than a decade. Corporate lending has emerged as the strongest segment, growing at around 20 per cent, while loans to agriculture and retail expanded 17 per cent and 16 per cent, respectively.
Jefferies also pointed to healthy automobile and property demand, suggesting that domestic consumption and investment activity are providing an important counterbalance to volatile global capital flows.
The outlook for the rupee has also improved, supported by stronger foreign currency inflows. The Reserve Bank of India’s scheme to attract foreign currency deposits from non-resident Indians has generated about US$41 billion of inflows so far. Jefferies expects the total to potentially rise to US$80-100 billion over the next two months before the scheme ends.
In addition, foreign investors have brought in US$8.7 billion into Indian government bonds since the beginning of June after interest income on such holdings was made tax-free. Jefferies said these developments increase the likelihood of rupee stabilisation. The currency, which had touched 96.96 per US dollar in May, was at 95.17 at the time of the report.
On monetary policy, the report noted that the RBI kept its policy rate unchanged for the fourth consecutive meeting while retaining a neutral stance. Jefferies’ India strategist Mahesh Nandurkar expects only one 25-basis-point rate hike during the current tightening cycle.
Jefferies sees a more supportive domestic backdrop for India, driven by strong credit growth, resilient demand and improving foreign currency flows. However, elevated cumulative foreign selling remains a key risk for the market, making the sustainability of domestic growth and further capital inflows important factors to watch ahead.
