Goldman Bets on Modi as Credit Suisse Hails Rajan: India Credit
Global investment banks are recommending buying Indian assets on optimism a leadership change at the central bank will be followed by a new government that businesses favor next year.
Goldman Sachs Group Inc. prefers stocks, saying investors are hopeful the main opposition Bharatiya Janata Party under Gujarat state Chief Minister Narendra Modi’s leadership will win national elections, as Prime Minister Manmohan Singh takes the blame for the slowest growth in a decade. Credit Suisse Group AG (CSGN) advises buying the rupee, betting Reserve Bank of India Governor Raghuram Rajan will curb inflation, while Brown Brothers Harriman & Co. is positive on sovereign debt.
“We are very comfortable with Rajan and his policies,” Ilan Solot, a strategist at Brown Brothers in London, said in a Nov. 5 telephone interview. “He has gained a lot of credibility that will help fixed-income markets, and gradually make investors more comfortable in buying Indian debt.”
Sovereign bonds returned 2.5 percent in October, the best performance since April 2009, HSBC Holdings Plc indexes show, as Rajan’s policies revived investor confidence and spurred a 1.8 percent gain in the rupee. The nation’s main stock indexes surged the most in Asia. Modi, 63, has been praised by businessmen including billionaire Mukesh Ambani, India’s richest man, and Tata Group’s former chairman Ratan Tata.
“Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi as an agent of change,” Goldman analysts, including Hong Kong-based Timothy Moe, wrote in a Nov. 5 report. “Politics are trumping economics.”
India’s credit rating may be cut to junk next year unless elections due by May lead to a government capable of reviving growth, Standard & Poor’s said in a statement yesterday.
Modi, credited with achieving higher growth than the national average in his home state, arouses strong emotions in the world’s largest democracy.
To followers, he’s a cult figure who dragged Gujarat from the ashes of anti-Muslim riots in 2002, wooing businesses and cutting red tape and corruption. To opponents, he’s an autocrat who failed to control the attacks by Hindu mobs or show enough remorse over the killings of more than 1,000 people. The U.S. refused him a visa over his alleged role in the violence.
Modi has denied any wrongdoing and a Supreme Court-appointed panel investigating one documented incident found no evidence that he took decisions to prevent assistance from reaching those being attacked.
Goldman on Nov. 5 boosted its stance on Indian stocks to marketweight from underweight. The U.S. bank said in a separate note last month that a BJP-led government may increase investment, while Singh’s ruling coalition will focus on boosting rural consumption.
Trade Minister Anand Sharma, a member of the ruling Congress party, said in an interview published in the Economic Times newspaper today the latest Goldman report is part of a “motivated campaign” that will fail to sway voters. The recent rally in India’s markets was largely due to global developments, especially in the U.S., and the government’s policies are boosting confidence, he was cited as saying.
Of the $297 billion of foreign direct investment that India received from 2000 to April 2013, about $20 billion came in under the rule of the BJP-led National Democratic Alliance coalition and the rest under the United Progressive Alliance headed by the Congress, Sharma said, according to the newspaper. BJP’s coalition ruled from 1998 to 2004 and the UPA has been in power since.
The Nov. 5 report “contains no political bias nor any political opinion by Goldman Sachs or its analysts,” Edward Naylor, a Hong Kong-based spokesman for the U.S. bank, said in an e-mailed statement today. “It simply notes that investor sentiment is being influenced by party politics. We stand by that assertion and by our research.”
The BJP will win 162 of 545 Parliament seats in general elections due by May, and the Congress 102, according to a poll published last month by C-voter polling agency, India TV and Times Now television. About 42 percent of urban voters are undecided about whom to vote for, a survey by Google India, conducted in July and August and published Oct. 8, showed.
Modi was the most-searched politician on the Internet in the last six months, followed by Rahul Gandhi, vice president of ruling Congress Party, according to the Google survey.
India’s financial markets ended a rout after Rajan, upon taking office as RBI governor in September, eased funding curbs to support growth in Asia’s third-largest economy and offered concessional swaps for dollars raised by banks -- a move Goldman says has helped soothe concerns about funding the nation’s external obligations. He also raised the benchmark repurchase rate twice in two months and vowed to sustain confidence in the rupee by keeping inflation low.
The rupee has rebounded 9.9 percent from a record low of 68.8450 per dollar reached Aug. 28 as the Federal Reserve delayed tapering stimulus that’s buoyed emerging markets. The 10-year benchmark bond yield has dropped 33 basis points, or 0.33 percentage point, from a five-year high of 9.24 percent on Aug. 19, while the S&P BSE Sensex (SENSEX) index of shares rose to a record during a special trading session on Nov. 3.
The benchmark equity gauge and the broader Nifty Index last month climbed 9 percent and 10 percent, respectively, the most in Asia.
Standard Chartered Plc says it remains neutral on Indian government debt, predicting the yield on the 7.16 percent note due May 2023 will end this year at 8.75 percent, compared with 8.91 percent today.
“Debt investors would still be concerned about elevated inflation and a hawkish monetary policy tone,” Nagaraj Kulkarni, a strategist at Standard Chartered in Singapore, said in a Nov. 5 e-mail interview.
Skandinaviska Enskilda Banken AB (SEBA) said that while it recommends buying the rupee now, the Swedish lender wouldn’t advise holding trades favoring the currency nearer to the elections.
“We like to go long-rupee tactically since the RBI continues to hike interest rates and put yield on the table despite the delay in Fed tapering,” Sean Yokota, head of Asia strategy at SEB in Singapore, wrote in a Nov. 5 research report. “The trade deficit has been diminishing.”
Dollar-based investors will earn 13.5 percent by the end of 2014 on purchases of the rupee, the highest returns among 33 global currencies tracked by Bloomberg after Argentina’s peso. The forecasts are based on projections for the exchange rate and current deposit rates. The yield on the 10-year benchmark bonds will drop to 8 percent in the same period, according to the median of seven forecasts in a Bloomberg survey of analysts.
Credit Suisse predicts the rupee will strengthen to 60 per dollar in about three months from 62.6375 today, as a record harvest damps food prices. Wholesale price inflation will ease to below 6 percent by the end of March from 6.46 percent in September, the bank forecasts.
“The better monsoon and a slowing Indian economy will in aggregate help to moderate inflation over the next quarter or so,” Ray Farris, the global head of currency strategy at Credit Suisse, said in a Nov. 5 telephone interview. “If that happens, it will enhance the credibility of the central bank. It will lead investors to perceive real yields as rising and increase the attractiveness of Indian fixed-income securities.”
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