By Anjan Roy
Global confidence in the India growth story is getting vindicated, as foreign portfolio investors (FPI) put their faith the Indian market by placing their money here into Indian stocks.
As a result, the Indian equity market is rising to unprecedented levels. The Bombay Stock Exchange index, which is the best gauge for judging the market sentiment, rose to an all-time high of 65,300 during Monday’s trading before closing at 65,205. For the first time, the market has scaled this peak.
The current spree has been led by the huge inflow of funds from Foreign Portfolio Investors (FPIs), that is, those who are putting money into the secondary market. The FPIs have brought in an additional around Rs3 lakh crore into the country in June alone. This is considerably higher than the last time brought in such massive amount in December 2020 of Rs2.55 lakh crore.
There are two aspects of this sudden optimism. One is the financial sector developments and the other is the real economy gains.
Notwithstanding the adverse impact of the Adani episode following the Hindenburg report, the Indian market has been pushed by other good news. The fundamentals of the Indian economy are thought to be strong. Look at the investor confidence in just one successful bank, HDFC Bank, and how it has soared in valuation. This cannot happen in isolation. An array of other corporates valuations are rising.
But no doubt the push to the financial markets has been the inflow of funds from overseas.
The biggest factor now seems to be working is the fear of China. There is a conscious move among US investors to hit their stakes from China to avoid being caught abruptly. The Chinese economy is slowing down, despite series of boosters from the government. The valuations are feared to erode, as the Chinese yuan is depreciating against the US dollar.
The latest move of the Chinese supreme leader, Xi Jinping, to bring in a Harvard trained economist as the governor of PBOC even has not worked on a positive sentiment. A new rule on foreign policy vests the Chinese authorities with sweeping powers to penalise and apply sanctions whenever the Chinese see any threat to its national interest.
These developments have unnerved the investors’ confidence in the country and the market sentiment has been hurt. As a result, the portfolio investors are shunning the Chinese market for any fresh investments. So the spill effect is being seen in other markets like India or Vietnam.
Added to this is the fear of arbitrary action. The US government has issued a travel warning on visiting the country on fears of restrictions on exit. These are creating a fear psychosis in which business confidence is getting eroded.
Such speculative money apart, India is being viewed as a favoured destination for foreign direct investment. A large number of western companies are viewing the possibility of making India the alternative manufacturing base for their high end products.
One of the two largest aircraft manufacturer, Boeing Company of USA, is considering to set up a final assembly line in India. Given the huge orders Indian airline services companies are placing with these producers, a final assembly line in the country could be a paying proposition.
India has a certain locational advantage in terms of servicing the big aviation markets. It straddles between the Middle East aviation hubs like Dubai on the west and Singapore and south-east Asian market on the east. Hence, kind of manufacturing base in India could be useful for serving such aviation hubs.
On the other hand, the security oriented industries, such as, high end chip manufacturers are also being India as a possible destination. TSMC, which is based in Taiwan and world’s largest chip maker, is also reportedly considering to develop a base in India.
Taiwan is under constant threat from China. The sabre rattling in the Taiwan straits, the narrow sea that separates the island from mainland China, is making the chip makers in Taiwan. More than the Taiwanese manufacturer, global users of the TSMC chips are more uncertain.
In case of a invasion of Taiwan by China, the chip supply lines would be totally disrupted. Besides, chips underlie all critical applications and any uncertainties in this area is unacceptable. Hence, the chip makers scouting for alternative sites for developing their new bases.
Of course, if the global assessment of India and readiness to bring in funds and investments in the country is a major contributor to the current buoyancy, the domestic factors are also contributing.
Quite radically, the Indian entity, HDFC Bank, has become the fourth most valuable bank in the world in terms of its market capitalisation. HDFC Bank and the Housing Development Finance Company have been merged together and the combined entity has been valued at a humongous $172 billion.
This is a case where a small housing loan company has transformed into a massive financial organisation vying with the largest and most valuable in the world. This is a remarkable feat.
Indeed, the Indian domestic economy is fighting fit and rebounding robustly after the covid pandemic. GDP growth is strong and the highest among major economies. The monsoon is also appearing to be on schedule and farm prospects are improving.
There is overall buoyancy in the economy and this is reflecting. But then, one cannot at the same time underline the risks as well. When there are some adverse global developments, the speculative portfolio investments tend to fly. The investments in the real economy are however a different bait. These are stable.
Hence, as the going is good, the option should be to pursue the direct investments in the manufacturing sectors and not just gloat over the financial markets scaling new peaks. (IPA Service)
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