India’s bank bailout plan may woo back foreigners

Indian equities – already among the top performers in Asia this year – may start drawing back foreigners after the government announced a US$32 bil (RM135.47 bil) rescue for state-owned banks weighed down by bad loans.

“Foreign investors will view this very positively,” said Sageraj Bariya, vice-president of sales at East India Securities. The plan “should inspire confidence in trade, industry and investors”.

Overseas investors so far in October have sold a net US$1 bil of Indian stocks, cutting their 2017 investment by 20% following the slowest economic growth in three years.

Even so, the S&P BSE Sensex and the NSE Nifty 50 set fresh records as domestic investors plowed money into shares, shrugging off concerns about how last year’s currency ban and a new tax regime were affecting corporate profits.

Earnings at NSE Nifty 50 Index members have trailed consensus forecasts for most of this decade, data compiled by Bloomberg show, prompting some fund managers to warn that valuations are too high.

Growth concerns may ease after the government announced the recapitalisation programme late Oct 24 and coupled that with a plan to spend US$106 bil on roads.

“This is a stimulus and the government has done its bit to kick-start growth,” said Sanjiv Bhasin, executive vice-president at India Infoline Ltd. “The earnings growth recovery which was supposed to happen in 24 months can now get pushed forward by a year.”

There are signs foreign funds may already be coming back. Overseas investors bought a net 36 billion rupees (US$556 mil) of shares on Oct 25, according to provisional data from the exchanges. The purchase was the biggest single-day inflow since June 13. India’s stock market has a total value of about US$2.2 tril, according to data compiled by Bloomberg.


‘Indian TARP’

Morgan Stanley dubbed the bank rescue the “Indian TARP,” a reference to the US Troubled Asset Relief Programme set up during the financial crisis. The programme could help add as much as five percentage points to gross domestic product, according to Goldman Sachs Group Inc.

“A substantial improvement in the growth outlook is likely to be bullish equities,” Goldman analysts led by Jonathan Sequeira wrote in a note on Oct 25.

Still, the banks first need to clean up their balance sheets and then post an increase in lending, according to Jefferies India Pvt. Some were concerned about the rescue itself.

“On the one hand, the money is not going to be enough,” said Rajendra Wadher, director at PRB Securities, referring to the government’s capital injection. “On the other hand, how is it going to be paid?”

For now, investors seemed to welcome the plan. The NSE Nifty PSU Bank Index, a measure of state-run lenders, surged a record 30% on Oct 25. State Bank of India’s 28% surge led gains on both the Sensex and the Nifty.

This article first appeared in Focus Malaysia Issue 256.