Samvat 2072 predictions are all over the place. There is little consensus on foreign or domestic investment flows. The one consensus is the expectation that the Reserve Bank of India (RBI) will continue to cut rates. There is room for disagreement even there, since the RBI governor's record indicates he can ignore "moral pressure".
Governor Raghuram Rajan doesn't seem very optimistic. He's said he hopes foreign investments will drive the economy in 2016, since domestic investment is likely to be low. He also estimates India's factories are operating around 30 per cent below capacity.
Of course, RBI is not focused on the stock market. The higher foreign direct investment (FDI) it hopes for might not have a direct impact on stocks. FDI rose about 19 per cent in the first six months of 2015-16, even before the government eased restrictions on these in 15 sectors.
But, FPI (foreign portfolio investment) dropped even as FDI rose. The lower FPI was at least partially instrumental in the stock market falling by 11 per cent. It is possible the stock market could fall even if FDI flows are high. This would be more likely if domestic investment is low, as RBI suspects.
India Infoline (IIFL) says the National Stock Exchange's benchmark Nifty could fall to 7,200, a 10-12 per cent correction from the current levels. Negative events could be the impending US Federal Reserve rate increase, possible currency devaluation by China, the shale oil crisis and the West Asia conflict. Foreign inflows will be questionable and might fall, it says.
'Big bull' Rakesh Jhunjhunwala feels the stock market is close to bottoming out and there will be a lot of domestic funds flowing in. He expects domestic institutions to contribute more to equity than foreign investors. RJ is worried about bad debts and the impact of non-performing assets (NPAs) in the banking system. Apart from that caveat, he is bullish, though he doesn't expect a new high for at least two to three quarters. Jhunjhunwala also expects positive foreign inflows, though he expects domestic investment to outrun these.
LIC Nomura Mutual Fund appears cautiously positive about foreign inflows, on the basis that India will do relatively better among emerging markets (EMs). Also, given the current gloom and depressed prices, it thinks overall returns could be positive in 2016.
One could quote other advisories but this is enough to show the lack of consensus. Jhunjhunwala is more sanguine about domestic investments than about foreign inflows. Rajan has the opposite opinion. IIFL is generally pessimistic and doesn't think foreign flows will be good. LIC Nomura thinks inflows from abroad will be relatively high compared to other EMs. Each can support their positions with logic.
FDI and FPI often tend to go hand in hand. Domestic investments into equity also tend to be strong when bank credit offtake is good. Right now, credit offtake is poor, with bank credit at decadal lows. Lower rates might help make credit more attractive, if indeed rates do ease down. Lower rates might also lead to more money entering stocks.
One has to concur with Jhunjhunwala in worrying that banking is likely to be under serious pressure in 2016-17. The bad debt situation hasn't been cleared. The government must also recapitalise public sector banks (PSBs) to meet Basel-III norms. The anticipation of equity dilution and the generally stressed nature of bank balance sheets will ensure that valuations of PSBs stay depressed.
RBI will have to manage the processes of Basel-III compliance. Banks will also have to repay about $30 billion raised in loans from non-resident Indians in the third quarter of 2013-14. That money is due by November 2016 and repayment or rollover could put more pressure on the rupee and on the banking system.
Lower interest rates should be a positive. Sentiment might not be as bad as the recent performance of the major indices suggest. There has been a fair amount of activity in the primary market and equity mutual funds have also got strong subscriptions. It is possible the market will do well.
My guess is that unrealistically optimistic assumptions were created when the Bharatiya Janata Party took charge and that led to a bull run, where valuations went far too high. The expectations are still being pared, 18 months later. It will take a while before valuations drop to fair value. Until then, the market is more likely to dip than soar.
