That 2012 would generally be a better year for the Indian stock markets, given the poor performance in 2011, wasn?t too much to expect. A few, however, must have expected foreign inflows of $1.8 billion in January itself. But then markets have rallied across the world with investors reaching out for equities, especially in emerging markets (EM), which had underperformed badly last year. India has got its fair share of the liquidity that central banks are allowing as also the bigger appetite for equities. So far, most of the money that has come into India is believed to have come in through ETFs, with less than half flowing into India-dedicated funds. Nonetheless, a 9% move, even after Monday?s fall of 371 points in the Sensex, is stunning.
With food inflation in India lately negative, the market seems to be betting that inflation will ease and with it, interest rates will come down, making the macro-environment a lot more benign. That?s pretty much the theme across the BRICs economies where central banks have been easing monetary policy; in India the RBI eased liquidity last week though it wasn?t sure when interest rates could be brought down. Right now, BRICs are valued a shade more attractively than non-BRIC EMs, with forward multiples of less than 10 times. However, India is less of a favourite than markets like China or Russia. That?s understandable given the state of policy making over the past year. The Street is now hoping that the political fortunes of the UPA government will improve with a better showing in the coming elections in Uttar Pradesh, where it might just end up supporting the Samajwadi Party (SP). An alliance with the SP would allow it to push through reforms giving industry the clarity in policy that it?s looking for and growth the much-needed kick-start. For the time being at least the market seems to have swept some of the larger problems ? slowing revenues and the widening fiscal deficit ? under the carpet. But then the world is now looking at the cash that might be created by a possible third round of asset purchases in the US with the Federal Reserve laying the groundwork last week for what could be a third round of quantitative easing. QEII fuelled speculation in commodities but this time around the money may be welcomed in most Asian economies since exports are weaker as are currencies; with growth slowing, say experts, inflows would be more balanced and with inflation coming off, might not do any damage.
To the extent that the money helps the US economy, Asian exporters would gain and so economies like Thailand and Indonesia may not need to resort to measures to restrict capital flows as they had last time.
India could do with some foreign flows; already the combined $ 5 billion or so has come in through debt and equity flows in January and has helped push up the rupee: a stronger rupee means a smaller oil bill and less imported inflation. The fundamentals remain weak with the infra sector growing at just 3.1% y-o-y in December. This is in sync with the corporate results for Q3 in which companies like BHEL saw orders drop and didn?t manage a single order from the power sector. Unless the government moves quickly to sort out issues relating to key resources and initiates policy reform, this might not be the last quarter in which earnings are revised downwards. And moreover, the flows may also not come in so fast.