Indian financial markets have struggled this month as the world’s worst COVID-19 crisis engulfs the country, but international investors are betting the economy will rebound quickly once the pandemic has passed.

Data shows more foreign investment money left India this month than it came in the entire first quarter, as catastrophic spike in deaths leaves the world’s second most populous country in the tournament. Read more

Before the upsurge, the International Monetary Fund, banks and rating agencies all predicted an impressive double-digit rebound in growth this year, but many of those forecasts will now have to be torn up.

Indian economists at JPMorgan have cut their second-quarter GDP estimates to -16% seasonally adjusted quarter-on-quarter from 6.5% and still see the risks of a greater stumble if the health crisis continues unabated.

Citi sees a “significant” chance of having to cut its forecast as well, while rating agency Fitch estimates that the government’s budget deficit will almost double to 14% of GDP this year and push the debt-to-GDP ratio up. India more than 90%.

“It is a really sad situation,” said Kiran Kowshik, emerging markets strategist at Lombard Odier, adding that the crisis was made worse by the weakness of India’s health system and the fact that many workers in the informal sectors need to be able to afford it. move for a living. .

The Indian rupee was one of the best performing currencies in the world this month, falling almost 2%.

Indian stocks (.MIIN00000PUS) underperformed major global indices (.MIWD00000PUS) by almost 7% and those of Brazil, which is also in the throes of a severe COVID-19 surge, by almost 12%.

Including the sale in the bond market, Societe Generale estimates that international investors withdrew more than $ 6 billion from India in April.

But with new targeted lockdowns, the government curbing vaccine exports, and ventilators and other supporters now arriving from overseas, Mumbai’s $ 2.4 trillion Sensex stock index (.BSESN) has gained ground. and the rupee is heading for its best week since August.

“Prime Minister Modi, and the partial structural reform he represents for investors, is neither politically vulnerable enough, nor Indian stocks expensive enough compared to history, to throw in the towel on what remains. best choice of countries in large emerging markets, ”said Hasnain Malik, head of equity research at Tellimer.

STAR ALIGNMENT

The $ 600 billion in foreign exchange reserves the central bank has built up are expected to dampen capital outflows, and unlike last year, credit rating agencies have avoided downgrading India, which has left India behind. would move out of the investment grade range.

Although Fitch has warned of increasing debt and the likelihood that already weak state banks will need more aid, he still believes the economy could grow 12.8% this fiscal year – which runs from March to March – after declining nearly 8% last year. Read more

“The problem with India is that the government deficits and debt are high, but they are held almost exclusively at the national level and the country has a very good history of growth,” said one of the main analysts. Sovereigns of S&P; Global, Frank Gill.

Lombard Odier’s Kowshik points out that the stock market decline this month comes after $ 36 billion was invested in Indian stocks between September and March.

Alistair Way, Aviva’s director for Asia and Global Emerging Markets, said his company was re-examining some battered Indian stocks, while others saw an increase in the country’s nascent domestic bond market.

The central bank has embarked on quantitative easing, and authorities hope influential investment index providers such as JPMorgan and Bloomberg will soon include India, one of the only investment grade-rated countries not yet listed. in these benchmarks. Read more

Foreigners only own 2% of Indian government debt, roughly compared to 20-40% in neighboring Indonesia and Malaysia, but the inclusion of indexes could quickly change that.

The government has already relaxed the strict foreign ownership limits that had been a major obstacle to inclusion. Analysts believe it will also need to be part of Euroclear’s key ecosystem, where buying and selling bonds are easier.

“The stars are lining up now (for index inclusion),” said Abhishek Kumar, managing director of State Street Global Advisors, who estimates that the local Indian bond market would eventually accumulate the maximum weighting of 10% allowed on the JPMorgan’s $ 200 billion to $ 300 billion GBI-EM index.

The $ 20-30 billion that could pay off over time “would go a long way to financing the budget deficit related to COVID this year,” he said.

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