Rescue plan may lure foreigners anew to Indian stocks

Indian equities, already among the top performers in Asia this year, may start drawing back foreigners after the government announced a $32-billion rescue for state-owned banks weighed down by bad loans.

“Foreign investors will view this very positively,” said Sageraj Bariya vice-president of sales at East India Securities. The plan “should inspire confidence in trade, industry and investors”.

Overseas funds so far in October have sold a net $1 billion of Indian stocks, cutting their 2017 inflows by 20 per cent, following the slowest economic expansion in three years. Growth concerns may ease as optimism builds that the recapitalisation plan will fill the gaping hole in capital that had curbed the banks’ ability to lend.

There are signs foreigners may be coming back: Their purchases of local shares on Wednesday was the most in eight months.

Earnings at NSE Nifty50 Index members have trailed consensus forecasts for most of this decade, data compiled by Bloomberg show, prompting some fund managers to warn that valuations are too high. Even so, the S&P BSE Sensex and the NSE Nifty50 have set fresh records as local investors ploughed money into shares, shrugging off concerns about how last year’s currency ban and a new tax regime were affecting corporate profits.

“This is a stimulus and the government has done its bit to kick start growth,” said Sanjiv Bhasin, executive vice-president at India Infoline Ltd. “The earnings growth recovery which was supposed to happen in 24 months now can get pushed forward by a year.”

Overseas investors bought a net Rs 6,800 crore ($1.1 billion) of shares on Wednesday, the biggest single-day inflow since February. India’s stock market has a total value of about $2.2 trillion, Bloomberg data showed.

Morgan Stanley dubbed the bank rescue the “Indian TARP,” a reference to the US Troubled Asset Relief Program set up during the financial crisis. The programme could help add as much as five percentage points to gross domestic product, according to Goldman Sachs Group Inc. “A substantial improvement in the growth outlook is likely to be bullish equities,” Goldman analysts led by Jonathan Sequeira wrote in a note Wednesday.

Still, the banks first need to clean up their balance sheets and then post an increase in lending, according to Jefferies India. Some were concerned about the rescue itself.

Bloomberg