Photographer: Krisztian Bocsi/Bloomberg

India Outflow: Deutsche Bank Says You Ain’t Seen Nothing Yet

Updated on
  • Fund exodus to accelerate in December, Abhay Laijawala says
  • RBI’s surprise rate hold reinforces Deutsche Bank’s concern

If you thought November was ugly, brace yourself for even more outflows from Indian assets in December, according to Deutsche Bank AG.

Foreign funds pulled money from Indian stocks at the fastest pace since 2008 last month as Donald Trump’s surprise election win spurred expectations for more rapid interest-rate increases in the U.S. and Prime Minister Narendra Modi’s cancellation of high-denomination bank notes hurt cash-based business activity. The bond market wasn’t spared, with the biggest monthly exodus since the taper tantrum in 2013.

“We think that the worst of the outflows are not yet over,” said Abhay Laijawala, the head of research at Deutsche Bank in Mumbai. “The markets cannot stabilize until selling by foreigners abates.”

Modi’s shock move to recall 86 percent of the currency in circulation in a bid to tackle corruption is taking a heavy toll on the economy, with Goldman Sachs Group Inc. slashing its fourth-quarter growth projection to 4 percent, compared with an expansion of 7.3 percent in the previous three months. The Reserve Bank of India held interest rates on Wednesday, surprising economists who had been expecting it to cut.

“The RBI policy reinforces our concern that emerging markets are needing to recalibrate their monetary policies in line with the strengthening dollar,” said Laijawala.

Foreign funds pulled $2.6 billion from Indian equities in November and $2.1 billion from bonds, exchange data show. The selloff is continuing, with $2.1 billion being withdrawn from debt so far in December and $88 million exiting stocks.

Deutsche Bank Forecasts

The S&P BSE Sensex Index fell 4.6 percent in November and is down 8.1 percent from this year’s peak on Sept. 8. The gauge advanced 1.7 percent on Thursday helped by gains in auto and steel stocks. Tata Steel Ltd climbed to the highest in a month while Tata Motors Ltd. rose for a fourth session, its longest run of gains in two months. India’s rupee sovereign notes have risen despite the outflows, returning 3.1 percent in the month through Wednesday, a Bloomberg index shows.

Deutsche Bank last month cut its year-end target for the Sensex from 27,000 to 25,000, which would imply a 6.3 percent drop from Wednesday’s close. It sees the rupee declining to 72.5 a dollar by the end of next year, 7.2 percent weaker than the finish on Wednesday.

“We absolutely don’t think that things have improved and global macro headwinds are still frosty,” Laijawala said. “Globally, we are at the end of the road for accommodative monetary policy and the huge dollar debt of emerging markets will hurt them.”