Worst over for capital flows, says HDFC Asset Management's Jain

Prashant Jain, chief investment officer at India's biggest money manager, said the nation may have seen the worst of capital outflows as the rupee stabilises and rising exports aid corporate earnings.

Foreign funds have bought a net $2.1 billion of domestic shares this month, the first monthly net inflows since May, after central bank Governor Raghuram Rajan announced plans to boost the currency when he took charge on September 4 and the US Federal Reserve decided to maintain monetary stimulus. Inflows helped the rupee rebound 10 percent from a record low of 68.845 per dollar last month and the S&P BSE Sensex to jump 10 per cent from its lowest level in a year on August 21.

"The worst of the economic pressures are behind us, and in six months to a year from today we should be in a much better situation," Jain, who manages $17 billion at HDFC Asset Management Co, said in an interview.

Jain is betting prospects of improving corporate earnings will lure foreign investors who withdrew $12.6 billion from local stocks and bonds in the last three months amid the weakest economic growth in a decade and a record current-account deficit.

Standard & Poor's said this month there is more than a one-in-three chance the nation will lose its investment-grade rating within two years, while Pacific Investment Management Co sees a "large" chance of a cut in as little as 12 months.

India's exports rose 13 per cent in August from a year ago, the most since October 2001, and imports dropped 0.7 per cent, government data showed September 10. Shipments were aided by a currency that is still 13 per cent weaker than its five-year average, and rising demand from developed nations.

Growth in the US beat estimates in the second quarter, while the euro-area economy expanded 0.3 per cent in the three months ended June from the previous quarter, exiting a record- long recession. The two regions took in 29 per cent of India's exports in June, Commerce Ministry data show.

The current-account deficit may not worsen because "the currency depreciation is making exports more competitive and imports more expensive," said Jain. India's $1.8 trillion economy may grow 5.5 per cent in the year to March 2014, versus five per cent in the previous 12-month period, the weakest pace since 2003, according to central bank estimates. PIMCO is more cautious amid concern there will be a sovereign downgrade, while HSBC Holdings Plc sees expansion slowing to four per cent this financial year.

"Although an outright credit default remains unlikely, the chance of a sovereign downgrade by one of the major credit agencies is large in the next 12-18 months," Roland Mieth, senior vice-president of emerging markets at PIMCO Asia, a unit of the company that runs the world's biggest bond fund, said in an interview on September 16.