In mid-September, the government side-stepped India’s fractious parliament and implemented reforms that allow for greater foreign investment in the retail and aviation sectors. There is hope the government will allow more foreign investment in the insurance sector.
The government also showed willingness to tackle the nation’s growing fiscal deficit by cutting subsidies for diesel fuel.
“This is seen as a positive, and a bold step,” D K Aggarwal, chairman and managing director of SMC Investments in Mumbai, said of the subsidy cut. “The general perception of policy paralysis — that has been kind of vanishing — and people are realizing the government is willing to take the reform process forward.”
The opening up of foreign investment — and the subsequent flow of investor funds into the country — will have implications throughout India, affecting companies ranging from materials maker Grasim Industries to fast-moving consumer goods companies like ITC Ltd., which will benefit from lower inflation. Even blue-chip U.S. companies like Wal-Mart are poised to benefit as they can potentially make inroads into the huge marketplace, dominated by a young working population. (More:India Declares, 'We're Back in Business')
India’s markets rose in the aftermath of the reform news as foreign institutional investors poured $3.5 billion into Indian stocks in September, the largest amount since February, according to theSecurities and Exchange Board of India.The BSE Sensex is up 21.4 percent through Sept. 28 while the MSCI India Index is up nearly 24 percent.
In another positive for India stocks, a government committee in late August recommended postponing tax reforms that had been proposed at the beginning of the year — and would have hurt U.S. equity funds, according to a September report by WisdomTree Research.
The flow of investor money into the stock market, and the Indian economy, is already boosting the value of the Indian rupee , which had declined precipitously along with the Indian market last year amid more global market concerns. The rising rupee should in turn be good news for India’s 7.55 percent inflation rate, as India is a net importer, particularly of commodities such as crude oil, diesel fuel and other raw materials.
A stronger rupee makes those commodities less expensive,which should help lower prices for consumers. Lower inflation could also prompt the Reserve Bank of India to cut interest rates — now at 8 percent — and that could kick-start capital expenditures by industry, igniting growth, Aggarwal said.
Economists remain wary that India’s inflation can be quickly tamed, however. HSBC wrote in an Oct. 1 note that “price pressures remain firm,” citing the fuel price hike, and prospects for food inflation as a result of a weak monsoon season in the country.
To side-step inflation worries, Sunil Asnani, co-manager of the $657 million Matthews India Investor , said his firm selects stocks that are able to do well even when inflation is present.
“We are over-weight in consumer stocks,” Asnani said. “A lot of them have significant pricing power and are able to pass on price rises over time.”
Some of Matthews’ top consumer discretionary holdings as of the end of June included battery maker Exide Industries and media company Jagran Prakashan, as well as more defensive consumer staples companies Emami, a consumer products company, and ITC, a consumer products company that also has businesses in hotels, paper and packaging, agribusiness and information technology. (More:A Fast Food Nation Turns Health Conscious)
Matthews also believes inflation will come down over time through investment in infrastructure, because inefficiencies in the sector can lead to higher prices. Companies in areas where the power grid is deficient, for instance, supplement themselves with more expensive generator power, he said.
As a result, Matthews invests in materials and industrials companies likely to benefit from increased investment in India’s infrastructure. As of the end of June, commercial vehicle maker Ashok Leyland and logistics company Container Corp of India were its key industrial holdings.