14 September 2022

India: A Micro and Macro Anchor Amid Global Uncertainty

India: A Micro and Macro Anchor Amid Global Uncertainty

Like other major economies, India has endured its fair share of headwinds over the last two years, including an extended shutdown in 2020 and a severe wave of Covid-19 in 2021. This year, however, amid skyrocketing commodity prices, India – once thought to be vulnerable to such external shocks — has surprised investors with its resiliency.

Recall that India was categorized as a member of the “fragile five” countries in 2013. Less than a decade later, amid unprecedented global challenges, India has proved itself to be anything but – and shown why it was wrong to include the country in that grouping.

The macro headwinds India has been facing seem to be receding. The fall in prices of global commodities, especially those that India imports, has brought inflation down from its highs earlier this year. This should reduce the possibility of further increases in interest rates and keep the cost of capital reasonable. Companies have not seen significant destruction in demand due to high inflation, as they were able to absorb part of it through excess production capacity while also benefiting from operating leverage.

Companies also have robust balance sheets, with low debt-to-equity levels. Bank balance sheets, in particular, have seen a cleanup of past bad loans, resulting in one of the healthiest net nonperforming asset (NNPA) ratios in a long time. As demand grows, we expect banks to continue to lend, and companies to willingly borrow, given the very low balance-sheet risk for both parties. We are also watching frequent corporate announcements of plans to augment capacity to meet future demand.

Listed Private Manufacturing Companies Have Low Leverage

Listed Private Manufacturing Companies Have Low Leverage

Source: Reserve Bank of India, July 2022. Data is based on 1,569 common listed private manufacturing companies.

Banks’ NNPA Ratios Have Mostly Fallen

Banks’ NNPA Ratios Have Mostly Fallen

Source: Reserve Bank of India, July 2022. PSBs are public sector banks, PVBs are private sector banks, FBs are foreign banks, and SCBs are scheduled commercial banks.

This change in both the macro outlook and micro factors has caused foreign investors to turn positive on India. After a period of constant foreign outflows, flows turned net positive in July. We are also seeing signs of a revival in initial public offerings and successful secondary market equity capital-raising.

Valuations have come off since their peaks last year and are more reasonable, albeit they do factor in earnings growth. Barring major unforeseen hurdles, India appears positioned for sustainable growth. All told, we believe investors should consider allocating capital to India, especially to companies with the potential to capture a significant portion of the expected growth. 


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