When Fed taper fears jolted emerging markets in 2013, India was one of the worst hit and was forced to raise interest rates to underpin its tumbling markets.
Fast forward to this year, and history has been turned on its head. Not only is the U.S. central bank raising rates, but India is widely expected next week to be the first country in Asia to cut policy rates this year.
And rather than being concerned at India’s falling policy rate premium over the United States, foreign investors are giving the country’s markets the thumbs up.
The rupee is rallying and the country’s bonds are in demand, offering some of the best inflation-adjusted returns in Asia. Inflation, long a thorn in the economy, is at its lowest in five years, economic growth is picking up and the current account deficit is a fraction of its old self.
Prime Minister Narendra Modi unveiled a national goods and services tax on July 1, raising confidence among investors that other measures to boost the economy would follow.
“The structural story for India remains pretty strong,” said David Cornell, chief investment officer of London-based Ocean Dial Asset Management, which argues India and other emerging markets will outperform over the next 12 months.
India operates some capital controls, including on foreign investment.
Foreign buyers have almost exhausted their quota in debt with net purchases of $21 billion this year — including record high inflows for a January-June period — after net sales of $6 billion last year. An auction of government and corporate bond quotas for foreign investors, which gives them the right to purchase additional debt, was heavily over-subscribed this week.
They have bought a net $8.8 billion in shares, more than the combined $6.3 billion of the previous two years, helping push indexes to record highs. Long positions in the rupee are the highest among major Asian currencies, a Reuters poll shows.
“My view would not change as a result of a rate cut on Aug. 2. Rate cuts are likely to be justified by lower inflation and higher-trend growth rates in India due to reforms,” said Jan Dehn, head of research, Ashmore Capital.