(July 7): Global investors returned to India’s financial stocks after a three-month selling streak, as the central bank’s recent measures to draw foreign capital ease funding constraints for lenders.
Overseas funds bought about US$1.5 billion of banking and financial-services shares in the two weeks through June 30, reversing earlier outflows to leave the sector with net inflows of US$357 million for the month, according to National Securities Depository Ltd data compiled by Bloomberg.
The renewed interest reflects growing confidence that the Reserve Bank of India’s recent incentives for banks to raise foreign-currency deposits will improve liquidity. The measures are expected to draw in more than US$50 billion, easing funding pressures that had constrained loan growth and improving the outlook for lenders.
“Foreign investor interest is beginning to re-emerge, going by the increase in client enquiries," said Macquarie Group analyst Suresh Ganapathy. Banks' valuations are cheap, credit quality is sound and growth remains strong, he said, adding financials stand to benefit first as global funds return to India.
The turnaround follows more than US$12 billion of foreign selling in the sector between January and May, as concerns grew about slowing credit growth and the impact of the RBI’s tighter oversight of the rupee market.
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The selloff left financial stocks, which account for about one-third of India’s US$5 trillion equity market, trading at compelling valuations. The NSE Nifty Financial Services Index, which includes banks, shadow lenders, insurers and capital-market firms, fell to its cheapest level in five years on a 12-month forward price-to-book basis in early June. The gauge trades at about a 21% discount to its long-term average.
The earnings outlook is also providing a fresh catalyst for banking stocks. Recent data showed credit and deposit growth at major banks exceeding analysts’ expectations, suggesting lending activity has remained resilient despite concerns that the conflict in the Middle East could weigh on economic activity.
Most banks have indicated that stress in unsecured lending is easing, while operations in the microfinance segment are nearing normalisation, analysts at Motilal Oswal Financial Services wrote in a note earlier this month. Growth momentum is healthy and foreign-currency deposits should help in deposit mobilisation until September, they said.
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