SINGAPORE -- The Indian ruling party's decisive win in recent local elections has heightened hopes for structural reforms touted by Prime Minister Narendra Modi while the economy keeps ticking along, once again drawing investors' eyes to the nation's stock market.
The benchmark BSE Sensex Index marked a record closing high just short of 30,000 on April 5. Driven by robust domestic demand, the Indian economy is said to be decoupled from those of other countries, so it continues to fare well even as growth in other big economies slows.
A different drummer?
The Reserve Bank of India said April 6 that it would hold its key policy interest rate steady but raise the reverse repo rate under its liquidity adjustment facility by 0.25 percentage point to 6%. The move, in effect a monetary tightening, surprised the market by signaling an economy healthy enough to sustain it. This came at a time when most central banks other than the U.S. Federal Reserve have struggled to find an exit from expansive easing policies.
The repo rate hike followed the landslide by Modi's Bharatiya Janata Party in local assembly elections March 11. The prime minister's growing clout will make it easier to advance such reforms as the goods and services tax to unify complex local taxes and the cleanup of nonperforming loans at banks, said Teppei Ino, an analyst at Bank of Tokyo-Mitsubishi UFJ here. In another sign of bullishness on India, the rupee has traded at its strongest against the dollar in about 20 months.
India's medium- to long-term growth will outpace other key economies, said Shun Hong, chief investment officer of Hong Kong hedge fund Hong Investment Advisors.
RBI Gov. Urjit Patel expressed confidence in an April 6 news conference that Indian growth will accelerate in fiscal 2017 compared with fiscal 2016.
Earnings before interest, tax, depreciation and amortization for Sensex components rose about 7% on the year in 2016, according to QUICK and FactSet. Market forecasts for 2017 average around 14%.
Earnings prospects are looking up especially for such sellers of consumer durables as motorcycle maker Bajaj Auto, which will no longer be weighed down by a cash crunch caused by the Modi government's sudden ban on high-denomination rupee notes. Asian Paints and port facilities operator Adani Ports & Special Economic Zone are also seen enjoying profit gains.
Overseas investors have been searching for opportunities to capitalize on earnings growth at Indian companies. Foreigners bought some $4.7 billion more in Indian stocks than they sold in March, making their net purchasing the most for any month since the launch of the Modi government and the highest in around five years.
Energy market exposure
But even the robust Indian economy has a weak spot. The South Asian country is a major energy consumer, and its imports of mineral fuels including crude oil came to more than 5% of nominal gross domestic product in 2015. The share is notably high among big economies.
India would take a hit if geopolitical risk in the Middle East leads crude oil prices to surge. Outflows of foreign investment or a move to full-fledged rate hikes could also chill the economy.
The Sensex index has lost a bit of steam since the U.S. missile strike on Syria this month. If American relations with such countries as Syria, Russia and North Korea worsen further, investors may shun risk globally, including in India, said Ranodeb Roy, CEO of Singaporean hedge fund RV Capital Management.
Indian equities are regarded as rather insulated from swings in the global economy and thus increasingly serve as a portfolio diversification tool. The resilience of their rally, so far backed by hopes for reform under Modi, will be put to the test against rising uncertainty in global affairs.