India’s economic landscape has seen positive changes with the decline in oil prices and a foreign exchange package in June, leading to improved financial conditions and increased inflows, as per a report. Foreign investors have shown more confidence, with significant bond inflows of $6.4 billion since early June and a recent shift to positive equities flows. HSBC Global Investment Research predicts that a surplus in the balance of payments and enhanced market sentiment could result in the Indian Rupee outperforming several other Asian currencies.
The report also highlights the impact of the June FX package, which introduced various measures like deposit incentives for overseas Indians and tax concessions for overseas bond investors, leading to a relaxation in domestic financial conditions. This move has contributed to a decline in yields across financial instruments even before the inflows from the package gained momentum. The report suggests that the combination of lower oil prices, a stable INR, improved liquidity, and robust nominal GDP growth could provide support for equities, although Foreign Institutional Investors’ (FIIs) preference for certain themes might limit inflows.
According to the report, the recent improvements in the market outlook have shifted towards a more positive risk sentiment, with FX and equities appearing undervalued compared to 2013. The report remains optimistic across various asset classes, emphasizing the importance of actual inflows and the Reserve Bank of India’s (RBI) actions on liquidity and foreign exchange. Additionally, the research firm has revised its GDP forecast for FY27 to 6.3% from the previous 6%.
The report also mentions that while government bonds may seem overvalued compared to 2013, structural changes such as the removal of the Foreign Institutional Investor tax and the expansion of the investible bond range could enhance the prospects for inclusion in global bond indices, supporting this asset class. Furthermore, improved onshore conditions could alleviate pressure on offshore USD corporate issuances by making local funding more competitive, especially in dollar credit markets.
