The worst might not be over

Hello, I am Priyanka Salve, writing to you from Singapore.

Welcome to the latest edition “in india“ — Your one-stop source for stories and developments from the world’s fastest-growing major economy.

Indian markets have been shaken by the Iran war, with foreign investors fleeing and valuations falling to rare lows. But fund managers tell me that low prices alone won’t drive investors back.

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For months, trade tensions with the US were seen as the biggest drag on Indian stocks. When two countries reach an agreement Trade deal in February Foreign investors poured in approximately $2.5 billion to Indian stocks. However, a month later, the market completely reversed itself.

India’s benchmark Nifty 50 fell more than 10 percent in March as foreign investors sold over $12 billion worth of stocks; This was the worst monthly sales in history.

The index currently trades at a price-to-earnings ratio of 19.6 times; This is a level rarely seen in the last decade. The only two occasions in the last decade when benchmark valuations in India fell this low were the early months of the Covid-19 pandemic in 2020 and the Russia-Ukraine war in 2022.

So I asked fund managers whether Indian markets are oversold and whether these almost historically low valuations are a good point to invest in the legendary “India growth story”.

Pramod Gubbi, co-founder of portfolio management firm Marcellus Investment Managers, told me that escalating conflict in the Middle East has revealed that India is “structurally exposed.” If there is no quick resolution to the war and oil prices remain high, India’s fiscal deficit, inflation and currency will come under pressure, “which will impact demand and earnings,” he said.

Gubbi added that earnings growth in India has been weak for more than a year and the current conflict will worsen this further.

Some of their concerns echo those expressed by India’s Chief Economic Adviser V. Anantha Nageswaran in a report published on March 28.

7.0%-7.4% growth forecast for the world’s fastest growing economy for the fiscal year ending March 2027 Nageswaran warned that it faces “significant downside” risk from rising energy costs and supply chain disruptions linked to the Iran war. It also expects the trade deficit to “increase significantly” and lead to “widening” [of] “Current deficit.”

In response to these pressures, the Indian government launched two significant interventions last week. The first was aimed at stopping the falling rupee Limiting foreign exchange hedging Positions that banks can take. The second was a special consumption tax cut on gasoline and diesel to prevent a rise in retail fuel prices that could worsen inflation.

While the rupee has strengthened thanks to currency curbs, Nitin Jain, CEO and director of Kotak Mahindra Asset Management Singapore, argued that keeping fuel prices artificially low “even by a quarter” could hurt the government’s spending on “productive” activities such as capital expenditure.

Nomura estimated in a note on Monday that a consumption tax cut of 10 rupees per liter could have a total annual fiscal impact of 1.65 trillion rupees ($17.6 billion). “Higher subsidy requirements [fertilizer and fuel] and potential revenue shortfalls could widen the fiscal deficit, underscoring the need to prioritize expenditure,” Nageswaran said.

Jain added that such diversion of funds from productive investment expenditure towards subsidies sends the wrong signal to foreign investors.

But today, net overseas direct investments in Indian companies are weakening to $1 billion to $2 billion, according to data shared by Indian ratings and research firm Care Ratings on Tuesday. Likewise, India’s net foreign direct investment flows as a share of GDP Significantly lower than those in Brazil and VietnamWorld Bank data shows.

Multinational companies and foreign investors still want a piece of India’s consumption story, but the country’s failure to create more white-collar jobs is undermining that narrative, experts say. Only a small fraction of graduates, according to a mid-March report by Azim University in India Securing “stable paying jobs” Within a year of graduation.”

Marcellus’ Gubbi said consumption is a key driver of India’s economy and a major magnet for foreign investment, but “there is no consumption without jobs.”

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IndiGo appoints industry veteran William Walsh as its new CEO
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India takes ‘huge hit’ on tax revenue to prevent fuel prices from rising during Iran war
The Indian government has reduced the central excise duty on gasoline and diesel for domestic consumption by 10 rupees ($0.11) per liter in a bid to prevent pump prices from rising as the Iran war disrupts global energy supplies. Petroleum and Natural Gas Minister Hardeep Singh Puri said this would be a “huge blow” to the government’s tax revenues.

is coming

April 6: HSBC Composite March final PMI

April 8: RBI’s monetary policy meeting