‘ Retail investment picking up’
GOOD NEWS High optimism about India among foreign funds, but clarity needed on tax laws and pace of reforms
Rashesh Shah, founder of financial services and research firm, Edelweiss, is busy joining the dots to make sense of the government’s plans, and is excited at what he is discovering. Shah spoke to HT on the growth of Indian economy and other issues. Excerpts: The markets have been very volatile. What are the reasons and how will this play out? There are three-four trends playing out, and one is about foreign investors, who have been hugely overweight on India. I was recently in the US with the finance minister. We found that the optimism about India is still very good. Our macro-economic stability is very high – rising forex reserves, rupee stability, infla- tion under control, and even the government’s fiscal deficit is under control. We are currently a $2-trillion economy; we will be $5 trillion by 2025. We will double our economy every seven to eight years. By 2025, we will be adding $1 trillion every couple of years.
The good news is that Indian institutional flows have become stronger. Mutual funds are adding ` 7,000-8,000 crore every month. This year MFs will bring in about ` 70,000 crore worth of equity, insurance companies another ` 30,000 crore and LIC will put in ` 50,000-60,000 crore. That is ` 1.50-1.60 lakh crore worth of flows. In last eight years, households’ percentage in financial savings kept dropping. Now, it has started inching up. Has financial savings gone up because other assets are not performing?
When the bank was giving you 8% and inflation was say 10%, it didn’t make sense to invest in financial assets. But, now we have positive interest rates. Gold and other assets are not doing well, commodity prices and real estate prices are down. Households save about $500 billion a year. Even if there is a 1% switch, it’s about $5 billion, which is ` 30,000 crore. That is the real trend in India. A 10% swing means $50 billion into financial assets — bank deposits, equity, insurance all of that. So Indian flows are acting as a floor and foreigners reallocating is acting as the cap. That’s why the market is in a range. Foreigners are selling at every rise and Indian investors are buying at every fall. I think this will go on for another five to six months.
Will this also reduce dependence on the FIIs for equity markets? It will. If you see the last few IPOs that have happened, most investors in IPOs are Indian and Indian institutional investors. Foreign investors will be largely responsible for market volatility, because they go in and out. I don’t think LIC goes out of India and invests in Indonesia, China. A lot of foreign money is also stable. Foreign investment in India is about $300 billion of which only about $30-40 billion is hot money. Out of $30-40 billion, even if $5-10 billion goes in and out, it creates volatility as our markets are not deep. But the intensity of the impact is going down. Earlier if foreigners sold $5 billion, market would go down 30%; now it’s only 10%. What are the concerns for FIIs now? There are five issues. First, foreigners want long-term stability on taxation. Second concern is on pace of reforms. If you connect all the dots, fair amount of structural reforms have happened. The third has been infrastructure. Fourth is public sector banks’ capitalisation and asset quality. The last is government stability and clarity and the policy framework. What do you think of the opening up of the Indian Railways? Indian Railways are going to be a key ingredient in getting the capex cycle revived. Then defence, Smart Cities and all other sectors will also get some investments restarted. At present, the railways spends ` 40,000 crore per year. They are going to step it up to about ` 1.5 lakh crore by 2018. Another very important feature is that the government is subtly encouraging foreign manufacturing in India. A lot of the foreign manufacturers like Foxconn have been told not to just import in India, but also start making in India. What are the new areas of growth for Edelweiss? In 2008, we were very capital markets-focused. We decided to broad-base into credit. Now, whether its wholesale credit, retail credit, distressed credit, half of our profits come from credit side and the other from capital markets, asset management, commodities. Our capital market business is still robust. Adding credit has been key for growth. Credit is the new equity.