The three Rs of investing in India
IN 2023, the catchy song Naatu Naatu from Indian Telegu-language movie RRR created history by becoming the first Indian film song to win an Oscar.
The film features two formidable protagonists – Raju and Bheem, who are complete opposites in terms of their personalities. Raju is brash, mercurial and indomitable, while Bheem, a shepherd, is protective, reliable and dependable.
But despite their differences, over the course of the film, both men come together at a pivotal moment in time to achieve a seemingly insurmountable goal. Similarly, we believe that India is having its “RRR moment” as the natural investment destination. We call it the “Renaissance, Reforms, and Returns” of India.
Interestingly, just like Raju, Indian equities as an asset class can be unpredictable and volatile, whereas Indian fixed income, just like Bheem, can be protective and reliable.
In our view, Indian equities and Indian bonds are two formidable forces capable of delivering potential returns for investors. And when combined, the investment outcome can be greater than the sum of its parts.
With that, grab a seat, get comfy and get set for our own investment re-telling of India’s RRR.
R - Renaissance of India’s financial market
In the film, Raju and Bheem resurface many times from their own ashes. Mirroring this, the economic conditions are already coming together for the India financial market. Case in point: demographics. India’s citizens have a young median age of 28 years, with the expected continuous growth of the working population up to 2050. Hence, India can expect to see a boost to its productivity and growth in the decades ahead.
Also, India’s low urbanisation rate of 35 per cent is set to accelerate with infrastructure growth. Coupled with the growth of the middle-income class from one-third to two-thirds of the population by 2047, these factors serve to fuel further consumption in India.
India’s economic resilience is also another factor that bodes well for the country and investors. The country has already seen an increase in services exports so far this year. This should lead to a smaller current account deficit, which would in turn add to the Indian rupee (INR) strength. The high amount of accumulated foreign exchange reserves of US$585 billion is also a strong anchor for the INR level.
The Reserve Bank of India (RBI), the central bank, also pointed to India’s resilient economic activity, forecasting gross domestic product (GDP) to grow at 6.5 per cent for FY2024, marginally higher than the previous forecast of 6.4 per cent. In addition, the decrease in crude prices is expected to help lower India’s current account deficit and inflation whilst bolstering its economic growth. On that note, RBI marginally cut its inflation projection to 5.2 per cent for FY2024, versus the previous 5.3 per cent forecast.
Taken as a whole, these factors are driving India’s renaissance amid global uncertainty and recession fears elsewhere.
R- Reforming India’s financial market
Again, Raju and Bheem both had the foresight to convert threats into opportunities to bring sweeping and positive change for their people and country. Raju and Bheem ultimately join forces to attain their common goal of ushering in a brighter future for their fellow citizens.
When the conditions come together, the right opportunities present themselves, but to successfully harness those opportunities, long-lasting reforms are necessary.
That is exactly what is happening in India right now – a number of reforms to further solidify its economic resilience have been initiated, and are at various stages of implementation.
Firstly, a reform to bring digitalisation to the masses. In July 2015, “The Digital India Programme” was launched. Coupled with growing Internet, smartphone penetration and the launch of United Payments Interface (UPI) in 2016, this has led to faster adoption of digital technologies, promoting both financial and social inclusion.
In FY23, digital transactions have already accounted for 76 per cent of GDP, up from just 4.4 per cent when the programme was first initiated. Of these, UPI accounted for 52 per cent of financial transactions in India in FY22. And at time of writing, 1.37 billion Indians have a digital identity.
Secondly, infrastructure development – another of India’s key internal reforms. In Budget FY23-24, capital investment outlay for infrastructure accounts for 3.3 per cent of the country’s GDP. Additionally, the launch of the National Infrastructure Pipeline has attracted financing and improved project preparation. With the capital investment outlay, an improvement in capex-to-GDP and higher productivity-led growth in coming years are expected.
Lastly, one of the country’s tougher reforms is the “Make in India” initiative to improve the cost and ease of doing business. The measures included reducing corporate tax rates from 30 per cent to 22 per cent in 2019. Furthermore, legislative policies such as the Goods and Services Tax Law, Real Estate Regulation Act and Bankruptcy Code have also been introduced in the previous five years. These policy moves were undertaken to promote domestic manufacturing in India.
R- Returns from the financial market
The RRR movie ultimately ends on a positive note with high hopes for a better and stronger India. And we are equally positive about India’s investment outlook prospects. Looking at the country’s equity markets, aggregate equity market capitalisation has risen two-fold in the past 20 years while the market capitalisation-to-GDP ratio has also increased to 87 per cent in the recent decade.
And in the fixed income markets, we see a higher interest rate advantage over developed markets and most emerging market bonds. For example, Indian 10-year government bonds are yielding an extra return of 2.98 percentage points, 2.72 percentage points, and 4.67 percentage points respectively above their US, UK and German counterparts as of Aug 24, 2023.
From a diversification perspective, over a 10-year horizon, Indian fixed income and global fixed income have shown a low correlation of 0.15. This, coupled with diversified sector allocation to corporate fixed income and government fixed income, can provide greater diversification benefits.
The whole is greater than the sum of its parts
Just as the mercurial Raju and dependable Bheem combined their considerable prowess to achieve a greater shared goal, Indian equities and fixed income have a symbiotic relationship.
The fixed income market has benefited from currency stability due to risk capital flows into India. Foreign investors are increasingly more confident about the currency thanks to a stable balance of payments.
Likewise, equity investment benefits from a stable rate environment and the valuations may get a helping hand once the rates start to come off in 2024.
Against this rosy backdrop, it’s no wonder Temasek has already announced that it is looking for strategic partners as it seeks to deploy between US$3 billion and US$5 billion a year in India and could commit as much as US$10 billion to the country in three years, based on their positive outlook on the country.
The question now is: Will other investors recognise the potential of the pivotal moment facing India and its financial markets? Will they seize the reins, just like Raju and Bheem, and be determined to harness the combined potential of Indian equities and fixed income?
Some may, some may not. Whatever investors decide to do, the time is ripe to usher in a much brighter future. With its RRR film, India has made history by winning its first Academy Award. And with its current Renaissance, Reforms, and Returns, we see another blockbuster in the making – this one in its financial markets.
Make sure you grab a front-row seat.
The writers are investment directors from HSBC Asset Management (Singapore). Sanjay Shah is with the Asian Fixed Income business, and Nilang Mehta, with Asian Equities.
