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‘India story’ back, stock market soars

The Bombay Stock Exchange (BSE) building is illuminated during a special holiday trading session on the occasion of Diwali, the Festival of Lights, in Mumbai, India, on Saturday. Brokers and investors at the BSE made token stock purchases during a one-hour trading session. PHOTO: BLOOMBERG

The “India story” is back as the country’s stock market soars and foreign investment pours in, lured by robust economic and corporate numbers, but some analysts see warning signs flashing.

Foreign investors have been racing to put their money into Asia’s third-largest economy, drawn by a slew of upbeat economic indicators and healthy quarterly corporate earnings growth.

The positive numbers have lifted the gloom that set in after the global economy soured. But now some analysts worry investors may be getting carried away in their enthusiasm for Indian assets.

“The market is getting overbought,” Amitabh Chakraborty, equities president of New Delhi-based Religare Securities said. “One should be extremely cautious. Most of the good news is already priced in.”

Others, though, such as brokerage Morgan Stanley, say the benchmark 30-share Sensex index could rise by another 13 percent by the end of this year, driven by strong company earnings.

The index is already up nearly 80 percent so far this year — ranking it among the top 10 performers globally — as foreign investors have pumped in US$13.6 billion into stocks.

They have snapped up shares from banking to construction to infrastructure, erasing last year’s outflows.

India’s rupee is also on a winning streak, trading near 46 to the dollar after plunging to a record low of 52 in March and many analysts expect it to firm more as the central bank uses a stronger currency to check inflation.

Last year, as economic growth faltered, the situation was radically different with risk-shy overseas investors rushing for the exits. The withdrawal of funds drove the Sensex in full-year 2008 down 52 percent — its worst slide in three decades — and put the brakes on the so-called “India story,” a reference to India’s rosy investment prospects.

But analysts now say foreign investors are increasingly looking at the country as a hedge against a weakening dollar, attracted by signs of an economic rebound.

“India is turning out to be a hot investment destination,” said C.K. George, managing director of Geojit BNP Paribas Financial Services.

Last week, figures showed India’s industrial output jumped by 10.4 percent in August, its biggest leap in 22 months, on the back of double-digit growth in manufacturing, mining and electricity production.

“India’s industrial sector is back and back with a vengeance,” HSBC economist Robert Prior-Wandesforde said.

But analysts caution the strong indicators are in large part due to government stimulus and aggressive interest rate cuts.

“We’re not yet back on a high-growth path,” said Dharmitikirti Joshi, principal economist at leading ratings agency Crisil.

Economists note credit demand growth is still weak, showing India’s economy is a long way from firing on all cylinders.

The government forecasts the economy will grow by 6.3 percent to 6.5 percent in the financial year 2009-2010, down from the 6.7 percent growth logged last year, and sharply below 9 percent levels in the three previous years.

Corporate profits are expected to log average 23 percent growth this fiscal year, according to the Centre for Monitoring Indian Economy, but that rise will be driven by lower rates and cost cuts. Revenues will grow by just 4.1 percent.

Analysts add Indian shares are becoming costly when contrasted with their earnings.

They also worry about when the central bank will have to start hiking interest rates to tame mounting inflationary pressures which could slow growth.

While inflation is still muted at under one percent, some economists expect it to reach 8 percent by next March.
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