Goldman downgrades India to 'underweight'

Cites flow reversal and sluggish growth as key risks

Goldman Sachs has downgraded its rating on India to ‘underweight’, citing increased risks of foreign institutional “flow reversal” from equities and the sluggish growth outlook. The investment bank cut its 12-month Nifty target to 6,200, adding if the rupee weakened further, more downgrades weren’t ruled out.

“Very little foreign selling has occurred in Indian equities, relative to the massive foreign inflows over the past few years,” Goldman Sachs analysts, led by Sunil Koul, said in a note to clients.

So far this year, foreign institutional investors (FIIs) have been net buyers in Indian stocks worth Rs 66,000 crore ($12.5 billion), against $25 billion last year. However, these investors sold shares worth Rs 6,086 crore in July. The most severe sell-off was recorded in the case of debt — in this segment, FIIs offloaded Rs 12,037.6 crore worth of bonds.

In July, Deutsche Bank and Morgan Stanley had lowered their ratings on India. While Deutsche had trimmed its Sensex target from 22,500 to 21,000, citing rising global risk aversion, Morgan Stanley had cut India’s rating among Asia Pacific markets.

Goldman said investment in India wasn’t favourable now, as a recovery in growth looked elusive and the economy was vulnerable. “Data on recent activity has been sluggish, with no signs of a pick-up in investment demand. The external funding environment has also become challenging, causing RBI (Reserve Bank of India) to tighten liquidity,” Koul said.

Goldman said it expected RBI to keep liquidity tight in the next three-six months, as the rupee might remain under pressure. On July 8, the rupee fell to a low of 61.21 against the dollar on speculation the US Federal Reserve would roll back its third round of bond-buying programme, known as quantitative easing, later this year. Investors were worried this would restrict FII inflows into the country.

“The external funding environment has become more challenging over the past few months, as markets began to price ‘QE tapering’ concerns and rising US yields,” said Koul. “The pressure on the rupee is likely to remain in place, if US rates continue to move higher (GS forecast: 2.75 per cent by the end of 2013 and three per cent by the middle of next year) and capital flows dry up or potentially reverse, putting pressure on the current account.”

Goldman feels export-driven sectors such as information technology and pharmaceuticals would benefit from a weaker rupee and better external growth, while the energy sector would gain from possible reforms in the domestic petroleum industry. It said sectors such banking and real estate seemed less attractive, owing to firming interest rates, tighter liquidity and slower domestic growth.
KEY OBSERVATIONS

• 12-month Nifty target cut to 6,200
• RBI would keep liquidity tight in the next 3-6 months
• Sectors such as IT, pharma to benefit from a weaker rupee
• Sectors such banking, real estate unattractive
• More downgrades haven’t been ruled out