India is solidifying its position as the fastest-growing economy among the Group of 20 nations, surpassing China since 2015 with a boost from a financial industry that is winning the confidence of global investors.
Financial markets can improve living standards by channeling savings, allocating credit and reducing the cost of producing and trading goods and services. In India, the financial industry now accounts for 36 percent of the country’s publicly traded companies, a world-beating increase of 11 percentage points during the past five years.
That helps explain why economists predict that India’s gross domestic product will expand 0.5 percentage point faster than China’s this year, 1.1 percentage points faster in 2018 and 1.6 percentage points faster in 2019, according to data compiled by Bloomberg.
India’s financial firms not only produced the best total return (income plus appreciation) of any industry—10 percent through the first six months of 2017—they also beat the emerging market equity benchmark by the most among 10 industries when measured in U.S. dollars, according to data compiled by Bloomberg. The exceptional performance coincides with improving currency stability, with the currency market anticipating the narrowest fluctuations for the rupee since 2008.
That makes it more attractive for traders to borrow in the U.S., where interest rates are 1.3 percent, and convert their dollars to rupees that can be loaned at 6.3 percent. The measure of this so-called carry trade adjusted for currency stability, the Sharpe ratio, favors India the most among the 31 most-traded currencies.
Record-low volatility for the stock market, where price swings in the benchmark S&P BSE 500 diminished to an unprecedented 8.7 percent, is making India the favorite emerging market among global investors, who poured $4.7 billion into India’s stocks and bonds through exchange-traded funds the past three years, the most for any emerging market.
India’s growing appeal to global investors is evident in the market for mergers and acquisitions. The country was involved in $164 billion, or 3.3 percent of all global merger activity in 2016, dwarfing the $42 billion, or 1.5 percent share, of five years ago. India also accounted for $11.5 billion, or 3 percent, of the global market for initial public offerings last year, up from 1.3 percent in 2012, according to data compiled by Bloomberg.
The biggest winners are Mumbai-based Yes Bank Ltd., whose market capitalization almost doubled the past two years, and Kotak Mahindra Bank Ltd., which appreciated 50 percent since 2015. Indian companies also sold a total of 1.1 billion rupees of debt this year, or 1.4 percent of the total comparable bonds issued worldwide. Five years ago, the ratio was only 1 percent.
“India is our favorite market in the Asian fixed-income space,” said Neeraj Seth, the Singapore-based head of Asia credit at BlackRock Inc., the world’s largest money manager, in a Feb. 17 interview with Bloomberg News. “India is a story which global investors will continue to like in 2017. It is one of the brightest spots of the emerging market complex.”
As the rewards increased, so have the risks. The measure of troubled debt, or banks’ average ratio of non-performing loans to total assets, almost doubled to 2.18 percent from 1.32 percent three years ago, according to data compiled by Bloomberg. That ratio still is well below India’s emerging market peers Brazil and Russia, as well as many countries in Europe.
Traders expect at least one risk to abate soon: the chance of rising interest rates. The market for interest-rate derivatives shows there is a 67 percent chance that the Reserve Bank of India will cut the benchmark lending rate in August. The probability based on market bets was 18 percent two months ago, according to data compiled by Bloomberg.
“We still like India, especially the currency,” said Mary Nicole, an investment strategist at Aviva Investors in Singapore.
(With assistance from Shin Pei)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.