The three Rs of investing in India

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 is a shepherd; 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 citizens have a young median age of 28 years¹, with the expected continuous growth of the working population up to 2050 and accordingly, India can expect to see a boost to its productivity and growth.

Also, India’s low urbanisation rate of 35%² 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 2047³, 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 USD 585 billion is also a strong anchor for the INR level.

The Reserve Bank of India (“RBI”), India’s central bank, also pointed to the country’s resilient economic activity, forecasting GDP to grow at 6.5% for FY2024, which is marginally higher than the previous forecast of 6.4%². 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% for FY2024, versus the previous 5.3% forecast.

Taken as a whole, these factors are driving India’s renaissance at a time when there is economic uncertainty everywhere else.

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 their country. Raju and Bheem ultimately join forces to attain their common goal of ushering a brighter future for their fellow citizens.

When the conditions come together, the right opportunities present themself but to successfully harness those opportunities, long-lasting reforms are necessary.

That is exactly what is happening in India right now where a number of reforms to further solidify its economic resilience have been recently passed.

To start off, a reform to bring digitalisation to the masses. In July 2015, “Digital India” 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% of the GDP, versus 4.4% when the programme was first initiated. Out of which, UPI has accounted for 52% of financial transactions in India in FY22⁴. Besides that, 1.37bn of India’s population already has a digital identity as of the writing this article.

Secondly, infrastructure development is also one of India’s key internal reforms. In Budget FY23-24, capital investment outlay for infrastructure accounts for 3.3% of India’s GDP⁵. Additionally, the launch of the National Infrastructure Pipeline has attracted financing and improved project preparation. Together with the capital investment outlay, an improvement in capex to GDP and a higher productivity-led growth in coming years are envisioned.

Lastly, one of the country’s tougher reforms is the “Make in India” initiative to improve the cost and ease of doing business in the country.  These reforms include reducing corporate tax rates from 30% to 22% in 2019. Furthermore, policies like Goods and Services Tax Law, Real Estate Regulation Act and Bankruptcy Code are also introduced in prior 5 years. All these are done to promote domestic manufacturing in India.

R- Returns from the India 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 the prospects of India. Looking at Indian equity markets, its aggregate equity market capitalisation has risen two-fold in the past two decades while market capitalisation to GDP ratio has also increased to 87%⁶ in the recent decade.

And in the India 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 point, 2.72 percentage point, and 4.6 percentage point⁷ respectively above their US, UK and German counterparts as of 24 August 2023.

From a diversification perspective, over a 10-year horizon, Indian fixed income and global fixed income have shown a low correlation of 0.15⁸. 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 benefitted 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 to 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 that India and its financial markets are undergoing? 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 already made history by winning its first-ever Academy Award. And with its current Renaissance, Reforms, and Returns, we see another blockbuster in the making.

Make sure you grab a front-row seat. 

A contribution piece by Sanjay SHAH, Investment Director, Asian Fixed Income and Nilang MEHTA, Investment Director, Asian Equities at HSBC Asset Management (Singapore). A version of this piece was first published in The Business Times on 26 August 2023.