Shashank Savla

More Indian rate rises likely after first since 2014

Shashank Savla

The Reserve Bank of India (RBI) raised benchmark rates by 25bps at its policy committee meeting on Wednesday, the first increase since 2014. Though consensus was for rates to remain on hold, the decision was not a complete surprise as a third of economists polled had predicted a hike. We expect the RBI to raise further, especially as the US Federal Reserve continues on its path of rate normalisation. This year, the Indian rupee has fallen almost 5% vs the US dollar – the second weakest Asian currency after the Philippine Peso. Due to their dual current and fiscal account deficits, India and Indonesia are two countries within Asia which are most in need of external financing and vulnerable to foreign exchange reserve outflows.

Over the past 12 months, we have seen a number of Asian countries raise interest rates, though for different reasons. While Hong Kong and Singapore tend to track US rates and followed Fed rate hikes, we also saw hikes by South Korea, Malaysia, Indonesia and the Philippines. South Korea raised rates by 25bps in November 2017 to start normalising rates from very low levels. Malaysia raised rates in January this year given the strength of the economy. Indonesia hiked rates twice last month to stabilise the Rupiah and Philippines raised rates to rein in inflation and to prop up the Peso.

For India, the RBI’s policy commentary noted upside risks to inflation and confidence in the growth outlook. India’s CPI (consumer price index) inflation has risen to more than 4.5% from less than 2% last year on the back of rising oil prices and a sticky core inflation. While economic growth has picked up, with real GDP at 7.7% in the first quarter, revenues from the newly rolled out Goods and Services Tax have been lower than expectations. Also, as we approach next year’s general election, we expect the Modi government to implement some populist measures which will put additional pressure on the fiscal account.

We continue to maintain the Fund’s underweight position in India. While India has underperformed this year, with a total return in sterling of -4.4% for the MSCI India so far compared to +3.5% for the MSCI Asia Pacific ex Japan Index, valuations still look pretty expensive.

Indian equity market outperformance post-Modi’s election has gradually unwound

Indian equity market outperformance post-Modi’s election has gradually unwound

India’s 12 month forward P/E ratio has de-rated to only 17.4x vs last year’s high of 18.7x and is still at a significant premium to the region’s 12.7x. While we have been constructive on the medium term economic growth outlook for India for some time, expensive valuations have precluded us from significantly adding to our positions. Our exposure in India is limited to companies in specific areas supported by government policy whose shares trade at reasonable valuations, such as affordable housing and infrastructure. We remain cautious on Indian equities in the near term and continue to see better investment opportunities in the rest of the Asian region.


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Friday, June 8, 2018, 11:37 AM