Indian Rate Cut Surprises, Bull Case Reaffirmed (Buy IFN, INFY)

We continue to remain optimistic on the outlook for India’s financial markets. India, unlike most of the emerging markets, has held up reasonably well so far in 2015.

Of the BRIC countries, India has had the strongest stock market performance in recent months, and with China’s struggles, India’s economy is now the fastest growing of the BRIC countries as well.

India, unlike Brazil and Russia, is not a major commodity producer and as such has benefited substantially rather than taking a hit from falling petroleum and metals prices.

Indian shares are down roughly 20% since last year’s peaks. That’s not a great performance, but compared to wipeouts in places like Brazil and Russia, the decline has been manageable. And it offers a better entry point for new investment dollars.

Over the past month Indian shares have been weak, in line with the global bout of fear driven selling. Unlike many other markets Indian shares even made new lows recently falling below the August flash crash lows.

However, the falling tide reversed sharply this week. India’s central bank made an unexpected decision to cut interest rates by a full 50 basis points in their most recent meeting. This surprised the market; most analysts had only been expecting a 25 basis point cut in the rate.

With the 50 point cut, the central rate has fallen to 6.75%. This marks the fourth cut on the year with the rate dropping from 8% at the start of the year down to under 7% now.
Inflation recently came in at a 9-month low, falling to 3.6%, and food prices generally remain stable despite some meteorological issues causing localized food shortages. With inflation not presenting a significant problem, the bank decided to take the initiative and cut aggressively to try to front-load a stronger economic upswing.

The country is growing GDP at 7% this year, an admirable rate for certain. However this is down from 8% or greater expectations. And parts of Prime Minister Modi’s economic plans are looking less certain. In particular, efforts to make India a manufacturing hub that can compete with China seem less vital with global growth falling so sharply. Who is able to buy the goods India is looking to produce?

Not surprisingly, Indian shares turned sharply higher following the unexpected stimulative boost. The India Fund (IFN) leapt 6% off recent lows.

The country’s currency, the Rupee, has risen four consecutive days now. Strong capital inflows from foreign investors are helping to boost both the country’s currency and its individual stocks. Infosys (INFY), one of the country’s tech company giants, has bucked the recent negativity and just put up a new 52-week high.

We believe the decisive action by the central bank shows that the country is prepared to take the steps necessary to maintain and stabilize economic growth. The country has performed well despite this bearing a most terrible of bear markets for emerging economies in general.

The long-term trajectory for India is great. The country is rapidly improving education, providing a way to lift much of the country into the middle class. And unlike China, India has not taken measures to severely stem population growth.

As such, India has a much brighter demographic future, with more population growth in general, and working age population in particular to look forward to. India has a long growth trajectory ahead of it and is still at a fairly low level now offering more potential to investors.

For long-term investors, this is a market you’ve got to be in. While a bumpy ride should be expected, the path is upward.

The relatively stability of the rupee and freedom from concerns about commodity prices put India into a class of its own in the emerging markets world. India offers a unique package and is a key piece in any diversified portfolio.

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