Back

TREND: Lenders’ optimism drives Indian equity binge of FPIs

Friday, Nov 27, 2020

 

By Chiranjivi Chakraborty

 

MUMBAI – The domestic equity market has attracted 705 bln rupees in net foreign inflows since Oct 1, likely to be the largest ever flows in a two-month period, and it has outperformed peers across the emerging markets basket.

 

While a confluence of external factors have seen money pour into equities of emerging markets like India, the outperformance might be explained by the clarity emerging about the impact of the COVID-19 pandemic on the country's lenders.

 

Foreign portfolio investors net bought local equities worth 294.5 bln rupees in the six-week period ended Nov 15, but as much as 52% of this amount was invested in shares of listed lenders, latest data available with National Securities Depository Ltd shows.

 

In absolute terms, shares of banks and non-bank lenders have seen net buying of 258 bln rupees in the six-week period and the amount is likely to have increased further in the past 10 days, dealers said.

 

There are several factors that have aided foreign investors' buying rush in lenders. The key reason being that the September quarter earnings of lenders showed they were in much better health than was expected at the beginning of the pandemic.

 

In March, foreign investors had panicked and withdrew more than 200 bln rupees, the highest ever, from stocks of banks and non-bank lenders. At that time, fear was the pandemic will cripple the financial sector that was already on its knees before COVID-19 struck these shores.

 

As it turned out, strong capital raising activity during the pandemic months by large banks and non-bank lenders, and concerted efforts by the corporate sector to reduce debt burden meant that balance sheet of lenders was in a much better shape.

 

Investors seemed re-assured by these companies' commentary that the situation is much better than general expectations on the asset quality front, said analysts at Goldman Sachs in a recent note.

 

The government bearing the burden for the relief provided by the Supreme Court on compound interest payable by borrowers who availed moratorium on their loans, and the measures taken by the Reserve Bank of India on restructuring stressed loans also lifted confidence.

 

The shift in narrative around lenders from fear to hope is encapsulated in Goldman Sachs' ratings upgrade of the country's largest lender State Bank of India shares to "buy" in August. Goldman Sachs had said at the time that the bank was "a proxy of improving investor confidence".

 

Banks have also benefitted from the increase in the weight of Indian stocks part of the MSCI's indices mandated by the index aggregator on Nov 11. Brokerages expect that the move alone will lead to $2.5 bln in fresh FPI inflows to India before the end of this month.

 

Kotak Mahindra Bank, which became a new entrant in the MSCI indices, alone will attract close to $800 mln in fresh buying from exchange-traded funds that track MSCI indices.

 

The shift in sentiment, the increase in India's country-weight by MSCI, and under-ownership of lenders by foreign investors because of better returns offered by other sectors earlier made for a perfect catalyst.

 

As a result, the Nifty Financial Services index has soared 34% in Oct-Nov, outperforming the Nifty 50 by a mile. The gains were driven by shares of Bajaj Finance Ltd, Bajaj Finserv Ltd, Kotak Mahindra Bank Ltd, IndusInd Bank Ltd, ICICI Bank Ltd, SBI, Housing Development Finance Corp Ltd and HDFC Bank, which rose 30-50%.

 

The sustenance of the buying interest from foreign investors will now hinge on the level of deterioration in asset quality lenders see once the apex court lifts the stay on tagging of bad loans.

 

However, if the optimistic guidance given by most banks and non-bank lenders on asset quality and growth turns out to be accurate, foreign investors' appetite may not be satisfied yet.  End

 

US$1 = 73.84 rupees

 

Edited by Ramya J.S. D'Rozario

 

Cogencis Tel +91 (22) 6619-0000

Send comments to feedback@cogencis.com

This copy was first published on the Cogencis WorkStation

© Cogencis Information Services Ltd. 2020. All rights reserved.

Other News

Vedanta cuts prices of aluminium ingots by over 1%

Wednesday, Jan 20, 2021 By Nikita Periwal MUMBAI – Vedanta Ltd has cut prices of aluminium ingots by 2,250 rupees per tn, or more than 1%, with effect from today, trade sources told Cogencis. This is the third consecutive price cut by the company in less than a month. The mining major had raised prices of its products by […]

BUDGET:StanChart Sahay sees debt-to-GDP ratio over 80% for a few yrs

Wednesday, Jan 20, 2021 –StanChart Sahay:Going back to 80% debt-to-GDP ratio can take few yrs–See debt-to-GDP ratio rising to 87-89% in FY21–Government may opt for gradual fiscal consolidation–RBI must ensure liquidity doesn't stoke inflation–Seems inflation peak is behind us –See inflation moving closer to MPC aim by mid-FY22  By Sanjana Raina and Bhaskar Dutta MUMBAI/NEW DELHI – Over the last few years, […]

BUDGET: Need job guarantee for urban poor, says academic Arun Kumar

Wednesday, Jan 20, 2021 By Rajat Mishra and Adrija Chatterjee NEW DELHI – Unemployment has been one of the most contentious issues plaguing the Narendra Modi government, and according to economist Arun Kumar, the Union Budget should launch a new urban employment guarantee scheme and step up expenditure on rural employment. "You need to step up expenditure on the rural employment […]