India has been losing its “dream market” status, a phrase conferred on it by none other than Warren Buffett, the investment wizard. India is going through a weak and sluggish phase marred by downgrades in debt ratings and slowest growth in a decade.
“India’s image has been spoiled and I feel the country has more downside,” Raj Kothari, a fixed-income trader in London at Sun Global Investments Ltd., told Bloomberg.
ValueWalk's Raul Panganiban interviews Dr. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, and discuss her approach to investing and the trends she is seeing in regards to quant investing and hedge funds. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with AlphaSimplex's Read More
Foreign investors pulling back from India
Over the past three months, steel king Arcelor Mittal and Posco pulled back their $12 billion investment plans, and global funds withdrew $12.6 billion from Indian stocks and bonds, making the situation even worse. The outflow of capital resulted in a weak rupee that dived to a record low and increased short term borrowing cost. Governments and two year bond yield, stood at the biggest premium to the 10 year rate in Bloomberg data since 2001. Realizing low growth potential, even Buffett closed his business in India and exited from an insurance distribution venture.
Small companies in India are lagging the most when compared to the bigger counterparts since 2006. The S&P BSE Small-Cap Index, covering 431 companies with a median market value of $91 million, has depleted 26 percent this fiscal, as against 2.4 percent rise in the Sensex, where the median value of 30 firms is $16.9 billion, according to Bloomberg data.
Investors losing confidence
Investors are skeptical about India getting back on the growth track, and handling budget and massive current account deficit, which forced the rupee to decline 20 percent in two years. According to Standard & Poor, there is more than a one-in-three chance of India losing its investment grade rating within two years. India ticked economic growth of 5 percent last year compared to average 7.6 percent in the previous decade.
Investors have lost confidence over RBI, and highly doubt its ability to get the economy back on track. According to Goldman Sachs Group Inc (NYSE:GS), the Indian economy will grow at 4 percent in the fiscal through March. Further, Goldman Sachs is expecting a downside of 72 in the rupee by the first quarter of 2014, whereas Macquarie group Ltd predicts decline to 75.
Current Account Deficit increased to a record 4.8 percent of gross domestic product in the fiscal year ended March 31st. Public finance dropped 4.9 percent, which was the highest among four largest developing nations. According to World Bank, more than 800 million people live on less than $2 per day in India where consumer price inflation has been around 10 percent for over a year.
Newly appointed governor of RBI, Raghuram Rajan has set out plans to give concessional swaps for banks’ foreign-currency deposits. Along with Rajan’s decision, the United States Federal Reserve’s decision to continue with monetary stimulus, which surged growth in the emerging market assets, has revived the rupee to some extent.
Foreign funds have bought a net $2.04 billion worth of Indian shares in September, and outflows from debt have slowed to $594.6 million.