Credit growth and capital inflows brighten outlook for Indian markets
Strong domestic credit growth and improving capital inflows are likely to support Indian markets, even as foreign equity selling remains heavy.
India's markets may find support in the coming months from robust domestic growth and improving capital flows, even as foreign investors' overall equity exposure stays weak, according to a recent research report.
The report noted that India saw net foreign buying of US$2.45 billion in equities in July, partly helped by an unwind of the memory trade. However, foreign investors remained net sellers of Indian equities to the tune of US$25.4 billion year-to-date, underscoring persistent pressure from overseas flows.
A more encouraging signal is emerging from the domestic economy. Bank credit growth has accelerated to 17-18 per cent year-on-year, the highest level in over a decade. Corporate lending is the strongest segment, growing at around 20 per cent, while loans to agriculture and retail expanded 17 per cent and 16 per cent, respectively.
Healthy automobile and property demand also point to domestic consumption and investment activity acting as a counterbalance to volatile global capital flows.
The outlook for the rupee has improved, supported by stronger foreign currency inflows. The Reserve Bank of India's scheme to attract foreign currency deposits from non-resident Indians has generated about US$41 billion so far. The report expects this to potentially rise to US$80-100 billion over the next two months before the scheme ends.
Additionally, foreign investors have brought in US$8.7 billion into Indian government bonds since the beginning of June, after interest income on such holdings was made tax-free. These developments increase the likelihood of rupee stabilisation. The currency, which touched 96.96 per US dollar in May, was at 95.17 at the time of the report.
On monetary policy, the RBI kept its policy rate unchanged for the fourth consecutive meeting while retaining a neutral stance. The report's India strategist expects only one 25-basis-point rate hike during the current tightening cycle.
While the domestic backdrop appears more supportive, elevated cumulative foreign selling remains a key risk. The sustainability of domestic growth and further capital inflows will be important factors to watch ahead.