Hot money stays sticky in India as rupee crisis looks over
Even as panic ebbs, it is worth dwelling on what has not happened during the recent period of trauma - international equity investors did not pull their money out of India, or at least not much of it.
It would be a stretch to say that India has had a happy few months. But its corporate sector remains blessed by good fortune in one respect at least: the continued faith of foreign investors in many of its leading companies.
The rupee has rebounded in recent weeks, after Raghuram Rajan, the new central bank governor, promised financial sector reforms. Nervousness remains about the potential shrinkage of the US Federal Reserve's quantitative easing programme, but most observers think the "taper" will be gradual. There is a sense that the worst of the currency crisis in Asia's third-largest economy might be over.
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That feeling of relief is almost certainly premature. But even as panic ebbs, it is worth dwelling on what has not happened during the recent period of trauma - international equity investors did not pull their money out of India, or at least not much of it. Instead, they kept faith with favoured businesses.
True, there have been outflows: a little more than $900m left stock markets during the worst of the crisis in August. But this has been more than made up in the first two weeks of September. Altogether, foreign funds have ploughed more than $2bn into Indian shares during this financial year, even as confidence in the macroeconomy has ebbed.
This matters because India relies on international capital more than most emerging markets. Foreigners own 22 per cent of its $1tn stock market, according to broker CLSA, and nearly half of the shares that are traded freely. If a good portion of this money suddenly dashed for the exits, the consequences would be disastrous.
The fact that it has not, so far at least, suggests an oddity. Short-term portfolio flows have been blamed for previous periods of emerging market turbulence, notably in the Asian crisis of the late 1990s, when rootless "hot money" seemed to rush out at will. In India, by contrast, the hot money is surprisingly sticky.
There is no charity in this loyalty, but there is what might be called a form of theology - namely a deep belief in the fundamentals of India's future growth held by managers of many "long-only" foreign funds, such as Aberdeen Asset Management and First State.
Their faith is manifested in large holdings of a few dozen stocks in sectors such as IT outsourcing, pharmaceuticals, consumer goods and financial services. The investors like these top performers, such as Tata Consultancy Services, Sun Pharmaceuticals or HDFC Bank, and are convinced they will prove resistant to any downturn.
"There are plenty of businesses here we like, which are high quality, high growth and with good governance," says an investor at one of the largest India-focused funds. "You don't always find that in other Asian countries."
There are other less positive reasons for sticking around, notably difficulties finding buyers in India's thinly traded markets. "They say this is the Hotel California of emerging economies," as one senior executive at a global bank put its. "Just like the song, you can enter, but you can't leave."
Yet there is typically an underlying long-term confidence, too, one that is rooted in basic factors: India remains a relatively poor country with plenty of room to grow; it also has favourable demographics and a potentially huge internal market.
The problem now is that, while recent market tremors seem not to have undermined this long-term faith, a sustained period of lower growth just might, which is exactly what India now faces.
HSBC recently cut its gross domestic product forecast for this financial year to only 4 per cent, less than half the level three years previously. Even well-managed companies can't escape the gravity of such a sharp slowdown forever. The odds of a long-awaited upturn in corporate earnings look slim.
Meanwhile, the golden group of sectors preferred by foreign investors is growing smaller, too. Once-favoured private sector bank stocks were hit by central bank measures to curb liquidity, while slower macroeconomic growth will eventually dent sales for consumer goods companies.
All of this only makes it more urgent that the government quickly introduces new steps to revive the economy through tax and labour market reforms among others. The continued loyalty of foreign investors rests on faith that growth will soon return to its previously heady levels. At present this looks unlikely. And the longer investors' faith is tested, the more likely it is that, come the next moment of crisis, an exodus will indeed occur.
James Crabtree is the Financial Times' Mumbai correspondent