LIC takes bullish view of Modi's India

By Himank Sharma and Rafael Nam

MUMBAI (Reuters) - The chairman of India's largest investor, Life Insurance Corporation of India (LIC), said on Thursday he saw few red flags ahead, betting on a long-term rally for the country's stock market under a new pro-business government.

India's equity market has outperformed emerging market rivals this year, thanks to overseas fund interest fuelled by Prime Minister Narendra Modi, who came to power in May with a pledge to boost growth and revive investment. After months of caution, domestic investors are now also growing more confident.

LIC Chairman S. K. Roy told Reuters he was "very bullish" about the banking, pharmaceutical, metals and IT outsourcing sectors because of expectations of a cyclical recovery and a stabilising rupee currency.

"There are a large number of sectors about which we are very confident this year," Roy said in an interview.

The state-run life insurer also likes the capital goods sector and is looking develop its existing holding of more than 70 land plots in phases over the next three to five years, either for commercial or residential purposes, Roy added.

Roy, who has been with the insurer more than three decades, added he saw few warning signs for markets, thanks to the government's commitment to contain the fiscal deficit and receding concerns about lower rainfalls in the monsoon period.

"The general perception in the country is that this rally will be around for some time," he said.

The growing confidence of India's domestic investors is seen as critical to sustain the strong performance of recent months, at a time of concern that overseas funds could start paring their holdings if the U.S. Federal Reserve raises rates.

LIC plans to invest 3 trillion rupees in markets this year, of which 550 billion will be in shares, more than an estimated 2.5 trillion rupees last year. The bulk of its investments will go to government bonds, traditionally its biggest allocation.

Roy added LIC was headed for a "very good year", both in terms of its market investments and its core insurance business. The chairman said he expected growth of 12 percent in insurance premiums this fiscal year, in line with 13.4 percent last year.

A GOOD YEAR

The strong endorsement from LIC, which has 17.69 trillion rupees ($290.29 billion) of assets under management, is a sign of a changing mood among domestic investors in India, which last year suffered its worst market turmoil since the 1991 balance of payment crisis.

LIC is a powerful market player in India whose moves shift sentiment, and who has also been known to step in to support markets at times of vulnerability.

Analysts say powerful domestic investors such as LIC will be critical to sustain a rally that has lifted Indian shares to record highs this year, as well as strength in bonds and the rupee - so far primarily driven by foreign investors.

India has been one of the best performing equity markets this year with the NSE index gaining about 28 percent so far, compared with a 5 percent increase in the MSCI emerging market index.

Equity mutual funds have seen 194.42 billion rupees ($3.19 billion) in domestic inflows this year, most of it over the past two months. That is well below the $14.14 billion bought by overseas funds, but marks a sharp change from two consecutive years of heavy outflows.

The confidence comes despite mixed data showing India's economy is recovering only slowly from its longest stretch of sub-par growth in decades.

Investors have also been somewhat disappointed by the lack of major policy reforms since Modi's election.

"It's a good sign and we can assume that at the current rate of inflows the markets will continue to gain and outperform," Atul Kumar, head of equity funds at Quantum AMC said.

"With so much domestic mobilization, you can expect the rally to spread out to smaller companies."

($1=60.94 Indian rupees)

(Additional reporting by Aditya Kalra in NEW DELHI, and Devidutta Tripathy, Abhishek Vishnoi in MUMBAI; Editing by Matt Driskill and Clara Ferreira Marques)