By Padma Venkat, CFA
To say that last year was annus horribilis for the Indian economy is an understatement. With inflation above 9%, the Reserve Bank of India raised key interest rates several times only to see GDP growth projections drop to the 6%–7% range. Meanwhile, the benchmark Sensex index fell 20%, the Indian rupee depreciated more than 18% against the U.S. dollar, and politicians were engulfed in corruption scandals. High oil prices, coal shortages, and the European banking crisis were no help, adding to the bleak economic picture.
Against this difficult backdrop, a panel of financial executives gathered in Mumbai last month — on the occasion of the second annual CFA Institute India Investment Conference — to discuss the outlook for the world’s second most populous country. Moderated by Bloomberg UTV’s Vivek Law, participants included Abheek Barua, chief economist and senior vice president of HDFC Bank; Ashutosh Bishnoi, acting CEO of L&T Mutual Fund; Manish Chokhani, managing director and CEO of Enam Securities; Navneet Munot, CFA, chief investment officer of SBI Funds Management; and Shankar Sharma, head of the quantitative trading strategy group at First Global.
Here are the key takeaways from their conversation:
- Perhaps surprisingly — given last year’s economic and financial challenges — the panelists felt sure that with a few policy tweaks the year 2012 will be better than 2011 and that the next three to five years will be even better for India.
- Munot drew a contrast between the “balance sheet recession” in the United States, Europe, and Japan and the “P&L cyclical correction” under way in India. He argued that when it comes to India, the structural drivers of the economy are still intact and make the country attractive to long-term investors.
- Several other panelists echoed this bullishness — with minor cautions. Sharma said that he believes the rate of change of India’s downward fall is now behind the country. Chokhani added that while the beginning of a bull market may not necessarily be under way, it is not the time to sell. And Bishnoi contended that long-term investing in high-quality Indian stocks at current prices could potentially deliver returns of as much as 13.5%. Still, he was skeptical about whether investors believe that they would be rewarded by the market today given that real interest rates remain negative.
- The panelists debated whether key interest rates and cash reserve ratios would be cut to stimulate growth. A few participants suggested that cutting rates is the only way to ignite growth. Sharma emphatically argued that there is a spurious correlation between rate cuts and the weakening of the rupee — and he further contended that cutting rates would propel inflows of foreign direct investment rather than outflows. Foreign institutional investors would be especially tempted with the Sensex at the attractive level of 12,000. Chokhani asserted that the Reserve Bank of India would likely reverse its policy cycle in a calibrated fashion. Since the central bank will not cut rates dramatically, growth is not likely to bounce back rapidly to the 8. 5%–9% range.
- There was some concern among panelists that a large portion of the external debt of “India Inc.” is short term and unhedged. Still, not all of the participants felt that this would shape up to be a major problem for Indian companies, as long as they are able to roll over their existing debts with European banks at the same rates. In addition, the panelists felt that the issue of whether Indian corporations will find the capital they need (or whether there will be a liquidity crunch) is a function of bureaucracy and policy paralysis rather than a lack of underlying appetite for credit growth.
- On a final note, the participants all agreed that the Indian stock market could move into positive territory this year as long as external factors — such as the potential for China to deleverage or crude oil prices to surge — don’t create strong headwinds.