As emerging markets stabilize, Indian markets start to show signs of life.
A couple of months ago the Indian market—along with the rupee—was making headlines for all of the wrong reasons. Over the past month, something has changed.
As recently as July every article you could read on the Indian economy foretold impending doom.
The country’s inflation rate was out of hand, the country’s largest firms were in an untenable state of indebtedness, and the country’s currency was in a free-fall.
While all of these risks are still very real, the market has finally seemed to get past them.
Going back one calendar year, it’s hard to find a country with more structural negativity surrounding it than India. True to form, the Indian stock market along with the rupee headed down in what seemed like a straight line.
While the weakness felt by Indian equity investors was disproportionate with the larger emerging markets space—the iShares MSCI Emerging Markets ETF EEM (B|96) has been about unchanged over the past year—it was by no means the only emerging market facing its share of difficulties.
The negative momentum accelerated into the fourth quarter of the year as asset sales at Indian “Blue Chip” firms seemed to signal a level of insolvency that even the most pessimistic investors hadn’t priced in. Between June and the beginning of September, the Indian equities markets and the rupee fell in earnest.
Then, as is so often the case these days, some well-timed commentary, policy shifts and a crucial appointment turned the country’s fortunes.
Changing Of The Guard
The turning point in India seems to be the late August appointment of new Reserve Bank Chief, Raghuram Rajan. Rajan, a former chief economist at the International Monetary Fund who famously predicted the 2008 global financial crisis, represented a changing of the guard in a country desperately in need of it.
Upon taking office, Rajan unveiled a wave of policy measures aimed at propping up both the country’s flagging equity market and the rupee.
Although the plan fell short of Shinzo Abe’s economic programs in Japan, it immediately stoked a fire in both the currency and equity market.
The programs included offering export firms increased flexibility in hedging currency exposure, implementing forex swap lines for Indian banks to raise funds from abroad, and expanding the country’s dwindling manufacturing base.
The following weeks brought more good news—at least as perceived by the market—including a surprise rate increase on Sept. 21. This, combined with a cut to petroleum prices by the country’s state-owned oil company, were a welcomed sight for a country grappling with the crippling effects of runaway inflation.
Without a doubt, the past month has been a banner period for Indian investors.
The local market returns have been boosted by the strength of the rupee—something that seemed impossible just a couple short months ago.
The iPath MSCI India ETN (B|88) is up more than 15 percent since the beginning of September. In the meantime, more targeted funds like EGShares India Consumer ETF (F|34} and the EGShares India Infrastructure ETF (F|4) have performed similarly. Over the same period, EEM has risen just over 5 percent.
While it’s impossible to say if some strong words from the new central bank chief and one rate increase will be enough to stem the tide of structural issues facing the Indian economy, the early returns are indeed promising.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected], and follow him on his Twitter handle, @BaiocchiPaul.