x Abu Dhabi, UAEFriday 21 July 2017

India opens up

The government has fired the starting gun with its Coal India IPO in a race to sell stakes in at least 60 state-owned companies. The issue was 15 times oversubscribed, signalling a huge market appetite that will enable the country to continue to help its poor.

Local observers hailed it as topping the "big league" of initial public offerings (IPO).

No sooner had the US$3.4 billion (Dh12.48bn) IPO opened for subscription on Monday than global investors scrambled to buy shares in Coal India, a state-owned company headquartered in Kolkata.

By the time bidding for the 631.6 million shares offered ended on Thursday, the IPO was almost 15 times oversubscribed, according to the National Stock Exchange of India.

It attracted bids worth $48.7bn, which Bloomberg estimates exceeds the combined GDP of Iceland and Latvia.

The sale of the 10 per cent stake in Coal India - a mining giant that dominates India's energy-starved market - is part of a government strategy to raise sorely needed cash through divestment to fund its myriad social schemes for the poor and cut its huge fiscal deficit.

Over the coming years, the government plans to sell stakes in at least 60 state-run companies, which analysts predict will generate similar exuberance in the market as overseas investors exude confidence in India's rapidly accelerating economy.

This month, the IMF raised India's growth forecast for this year to 9.7 per cent, the second fastest among leading economies after China. The economic expansion in India exceeded expectations, the fund said, as it revised its forecast for the Asia/Pacific region to 8 per cent, almost one percentage point higher than its forecast in April.

Analysts say the Coal India IPO, the country's biggest public issue, is a sign that India will continue to be a magnet for foreign fund inflows for the foreseeable future despite recent concerns by some economists that the pace of growth could lose momentum. Rattled by dour forecasts of a double-dip recession in sluggishly growing developed markets, global investors are pumping billions of dollars into emerging economies such as India.

The Securities and Exchange Board of India says foreign institutional investors (FIIs) have bought a record 1.09 trillion rupees (Dh89.87bn) of Indian stocks and bonds so far this year - more than twice the investment in the comparable period last year.

"With low interest rates and growth and abundant liquidity in advanced countries, it is no wonder that investors would be sending funds to emerging market countries like India where investment returns are significantly higher," says Steven Dunaway, the adjunct senior fellow for international economics at the Council on Foreign Relations, a foreign policy think tank based in Washington.

The flood of foreign fund inflows has pushed the 30-share benchmark Sensex past the 20,000-point mark and it is now hovering close to the peak level of 21,206 attained in January 2008, just before the onset of the global recession.

The index has climbed 16 per cent so far this year and is the best performer among the world's 10 largest stock markets, according to data compiled by National Stock Exchange.

CNI Research, a research organisation listed on the Bombay Stock Exchange (BSE), predicts the Sensex will cross the 21,000 mark next month. And a Reuters poll released last month estimates the BSE will climb to 21,500 by the middle next year, riding on financial stocks that are expected to rise because of improving loan demand in an upbeat economy.

But individual investors, many of whom got their fingers burnt in the stock market crash two years ago, are wary of FIIs. After climbing to a record peak in 2008, the benchmark Sensex plunged 53 per cent, its biggest annual decline, as FIIs pulled out almost $5bn from the stock market.

Rising foreign capital inflows are also leading to a sharp rise in the value of the Indian rupee. The currency has appreciated by up to 5 per cent so far this year, denting profits and harming the competitiveness of the country's export-dependent businesses.

"With further appreciation in rupee and hardening of interest rates, the growth of manufacturing sector may be significantly affected," warns Amit Mitra, the secretary general of the Federation of Indian Chambers of Commerce and Industry.

The excess liquidity in the market is also raising concerns about inflation, which the Reserve Bank of India (RBI) says is a "dominant concern". India's headline inflation touched 8.6 per cent last month, much higher than the central bank's prediction of about 6 per cent.

In a bid to limit fast-rising consumer prices, the central bank raised its key borrowing rates for the fifth time this year in August. It boosted the repurchase rate at which the central bank lends to commercial banks from 5.75 to 6 per cent and the reverse repurchase rate from 4.5 to 5 per cent.

Tushar Poddar, the chief India economist for Goldman Sachs, expects the RBI will raise policy rates by 25 basis points in the bank's next review meeting at the start of next month.

By the end of June, Mr Poddar expects the bank to raise rates by another 75 to 100 basis points, significantly higher than market expectations of an increase of 25 basis points.

"If we do not regulate economic activity at all, we can have poor people getting trapped in debt and a repeat of the crisis of 2007," Subir Gokarn, the deputy governor of the RBI, said this month.

"On the other hand, if we over regulate we will kill innovation and harm economic growth. The solution to this dilemma is not easy."

The RBI intervened this month to bring down the appreciating value of the rupee by buying dollars in the foreign-exchange market but the government ruled out any large-scale intervention to restrain foreign capital inflow.

"I do not consider that that situation has arisen," said Pranab Mukherjee, the Indian finance minister, said this month.

"As far as the foreign institutional investment … in India is concerned, I do not consider that it is going to be too volatile in the present situation."

 

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