India’s bid to lure overseas capital by loosening curbs on stock investments may be undermined by Europe’s debt crisis, according to a strategist who predicted a year-end drop for the nation’s equities.
“This is a desperate attempt by the government to bring dollar flows to stabilize the rupee,” said Indrajit Sen, a Mumbai-based derivatives strategist at Fortune Financial Services India Ltd. (FFSI) “Overseas retail investors may not invest aggressively.” Sen said in October the S&P CNX Nifty Index (NIFTY) would fall to 4,600 by Dec. 31. It ended last year at 4,624.
India’s government said on Jan. 1 it will allow overseas individual investors to buy local equities directly in a move to broaden foreign flows into the nation’s $1 trillion stock market. The new policy may take effect by Jan. 15, the government said. Currently, overseas retail investors can only buy Indian shares through participatory notes, derivative products held offshore by investors or hedge funds not registered with the regulator.
Foreign institutional investors (FIINDRGP) pulled out $512 million from local equities last year, compared with a record inflow of $29.4 billion in 2010, as Europe’s debt crisis threatened the global economy and reduced demand for emerging-market assets. The withdrawals contributed to a 25 percent slide in the BSE India Sensitive Index (SENSEX) and the S&P CNX Nifty Index in 2011, the second worst annual decline for both gauges, and helped send the rupee to an all-time low.
The Sensex jumped 2 percent to 15,843.70 at 12:44 p.m. in Mumbai, set for the biggest gain in two weeks.
Parliamentary gridlock, high inflation, a widening budget deficit and the weakest quarterly economic growth in two years dragged India’s rupee to a record low of 54.305 per dollar on Dec. 15, lifting import prices in a nation that buys 80 percent of its oil from abroad. Opposition from coalition allies last month prompted the government to delay indefinitely plans to allow overseas retailers to expand in the country, deepening a yearlong deadlock in policy making.
Easing rules for individual foreign investors “should reverse the perception of policy paralysis governance for the time being,” D.S. Rawat, secretary general of the Associated Chambers of Commerce & Industry of India, the nation’s third biggest trade body, said by e-mail yesterday.
India’s current-account deficit widened to near a record last quarter, the central bank said Dec. 30. The gauge of trade and investment flows posted a $16.89 billion shortfall in the three months ended Sept. 30 as Europe’s crisis hurt demand for Indian exports while a 16 percent decline in the rupee last year made imports expensive. The European Union is the Asian nation’s biggest trading partner.
“I am concerned about fiscal stability in future because our fiscal deficit has worsened in the past three years,” Prime Minister Manmohan Singh said in a New Year’s statement to the nation. “We have run out of fiscal space and must once again begin the process of fiscal consolidation.”
Earnings forecasts for Sensex companies for the year ending in March 2012 have fallen 8.7 percent to 1,150 rupees per share, the most since the year ended March 2009, according to about 1,500 estimates compiled by Bloomberg. The earnings season for the quarter ended Dec. 31 begins next week.
“The government has started to understand that it needs solutions and is taking small steps like allowing foreigners to invest directly,” Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd., India’s second-biggest money manager with $17 billion in assets, said in an interview with Bloomberg UTV yesterday. “We are in a bit of a problem from a fiscal deficit, currency, government finances and corporate profitability perspective.”
While individual foreign investors may not rush in, the new rule allows them to take bets on small and medium-sized companies usually overlooked by large investors, Chokkalingam G, chief investment officer at Centrum Broking Pvt., said by phone from Mumbai yesterday.
“Foreigners will now be able to invest directly in the huge universe of Indian stocks and a lot of untapped micro and small-cap stories,” he said. “They could also get services including capital advisory and portfolio management.”
Indian equities are influenced by offshore (FIINNET) flows. A record flow in 2010 made the Sensex the best performer among the top 10 markets globally that year. The largest-ever outflow in 2008 led the biggest annual slump of 52 percent. Widening the class of investors may help reduce this volatility, the government said in its statement.
Foreign institutional investors have placed 4.443 trillion rupees in local stocks and 1.2 trillion rupees in bonds since they were allowed into the nation in 1993. There were 1,767 offshore funds registered with the Securities & Exchange Board of India as of Jan. 2, according to its website.
Flows through participatory notes accounted for 19.1 percent of the 9.38 trillion rupees of overseas funds invested in local equity and debt at the end of November, data compiled by the regulator show.
“Foreign capital flows to India have significantly grown in importance over the years,” the government said in its Jan. 1 statement. Still, “a large number of qualified foreign investors, in particular, a large set of diversified foreign nationals who are desirous of investing in Indian equity market do not have direct access.”
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