India stocks lure most flows in 5 weeks on rate cut hopes

Bloomberg/Mumbai

Overseas funds bought the most Indian equities in five weeks on speculation slowing wholesale price inflation and falling commodity prices will spur the central bank to cut interest rates next week.

Foreigners bought $292.1mn more of local stocks than they sold last week, the most since the period ended March 15, data from the nation’s market regulator showed. The purchases boosted this year’s net inflows to $10.6bn, the second- largest amount among 10 Asian markets tracked by Bloomberg, behind Japan.

India’s S&P BSE Sensex posted its steepest advance in more than four months last week as data showed wholesale-price growth slowed to a 40-month low in March. Brent oil slid below $100 a barrel for the first time since July last week and gold slid the most since 1983, reducing import costs for the two commodities that fuelled India’s record current-account gap in the last quarter of 2012. The country ships in more than 80% of its oil and is the world’s largest bullion buyer.

“India will benefit from the lower oil prices as it is a net importer of oil and the drop in gold, given that they are heavy importers, will help the current-account deficit,” James Thom, a fund manager at Aberdeen Asset Management, said in a phone interview from Singapore April 19.

The shortfall in the nation’s current account, together with a consumer-inflation rate that exceeds 10%, has deterred the Reserve Bank of India from making further cuts to borrowing costs after 25 basis-point reductions in January and March. The central bank may reduce its key rate by another 25 basis points, or 0.25 percentage point, at a May 3 review, according to 14 of 16 economists surveyed by Bloomberg.

Another rate cut would help revive economic growth, Finance Minister Palaniappan Chidambaram said in an April 19 interview from Washington, where he was attending meetings of the International Monetary Fund and the World Bank. Chidambaram also met investors in the US and Canada in a bid to woo capital to fund the current-account deficit.

“Conditions are shaping up positively for us,” Ashima Goyal, a member of the Reserve Bank of India’s technical advisory committee, said in an interview April 16. She is part of the panel that makes recommendations to RBI Governor Duvvuri Subbarao on setting monetary policy. “As inflation comes down as a result of commodity prices softening, policy makers can encourage growth more,” Goyal said.

Declines in oil and gold may help cut India’s import costs by almost $7bn in the 12 months to March 2014, Barclays analysts wrote in an April 17 note.

Overseas funds bought a net $152mn of local shares on April 22, taking the month’s net purchases to $454mn, data from the regulator show. Inflows into Indian equities may continue, Brahmaprakash Singh, chief investment officer for equities at Pramerica Asset Managers, said in Mumbai yesterday.

“In the past, we have seen high global liquidity being accompanied by higher commodity prices, but the current scenario of abundant liquidity and falling commodity prices presents a good opportunity for Indian markets,” he said.

The Sensex fell 7.3% in the five weeks to April 12 on concern the slowest economic expansion since 2003 and the highest inflation rate among major emerging nations will curb profit growth. Net income at about 43% of the 30 Sensex-listed companies trailed analysts’ forecasts in the three months ended December 31, compared with 40% in the previous two quarters, data compiled by Bloomberg show.

The index trades at 12.9 times projected 12-month profit, down from this year’s peak of 13.8 in January. The MSCI Emerging Markets Index trades at 10.2 times. Indian markets were closed for a holiday April 19.

Inflation in Asia’s third-biggest economy, as measured by the wholesale-price index, slowed to a more than three-year low of 5.96% in March. The consumer gauge increased 10.39% last month from a year earlier. India’s gross domestic product rose 5% last fiscal year, the weakest pace since 2003, according to statistics agency estimates.

Prime Minister Manmohan Singh’s government has been taking steps since September to open India’s economy to more foreign investment, curb the budget shortfall and speed up stalled infrastructure projects. The measures prompted foreign funds to buy a net $24.5bn of stocks last year, the most among 10 Asian markets tracked by Bloomberg. The Sensex rallied 26% in 2012, the measure’s best performance in three years.

Foreigners have been net sellers of Indian stocks in just two of the past 13 years, based on data compiled by Bloomberg going back to 2000. Inflows climbed to a record $29.3bn in 2010, making the Sensex the best performer among the world’s 10 biggest markets that year. The largest-ever outflow in 2008 amid the global financial crisis triggered the biggest annual slump of 52%.

Meanwhile, rupee fell to a one-week low on concern reports casting doubt on the strength of the global recovery will damp capital inflows, making the currency more vulnerable to a record current-account deficit.

The rupee declined 0.4% to 54.3850 per dollar. It touched 54.43 earlier, the weakest level since April 16. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 15 basis points, or 0.15 percentage point, to 8.45%. Markets are closed today for a public holiday.

Three-month onshore rupee forwards traded at 55.34 per dollar, compared with 55.15 Monday. Offshore non-deliverable contracts were at 55.17 versus 54.93.