India’s economy – having been decimated by multiple waves of COVID-19 and strict lockdown measures – is now firmly in recovery mode. According to the OECD (Organisation for Economic Co-operation and Development), India’s economy is projected to expand by 9.9 per cent in 2021, making it the fastest growing economy in the G20.1 The rejuvenation of India’s economy is being facilitated by a number of positive macro fundamentals. It is also being assisted by the government’s commitment to market liberalisation and reform, – which has been in train now for over three decades. HSBC Markets and Securities Services looks in depth at some of the drivers behind India’s spectacular economic revival.

    Strong fundamentals fuel a resurgence

    Despite the challenges India has faced over the last 18 months, the situation does appear to be calming down. Pranjul Bhandari, Chief Economist, India, HSBC, said India’s vaccination drive was accelerating with most experts anticipating that 85 per cent of the adult population will have received a first jab by the end of the year. “The economic costs arising from subsequent waves of COVID-19 has been declining. This is because more companies are now learning how to live in this ‘new normal’ environment,” explained Bhandari. Moreover, she stressed that the investment environment in India was incredibly buoyant, highlighting there were a number of very attractive sectors including IT and software; start-up companies and digital payments. “I am confident that India’s GDP will reach its pre-pandemic levels by the end of 2021,” said Bhandari.

    Capital markets – an area to watch

    In terms of capital markets, Bhandari said the Reserve Bank of India’s (RBI) bond purchasing programme and its decision to keep interest rates low meant there was plenty of liquidity in the system. Furthermore, Bhandari noted macro stability had been reinforced by the country’s record foreign exchange reserves, now totalling almost USD600 billion. 2However, India does face some risks, which could derail its recovery. With the world now finally emerging from COVID-19, Bhandari said short-term inflation – as a result of the rising commodity prices and supply chain disruption – was a risk potentially facing India. “The jury is still out as to whether inflation will be long lasting,” she added.

    Elsewhere, the Indian government has taken on extraordinary amounts of fiscal debt – which is among the highest of all the emerging markets – and this could pose challenges in due course, she said. India’s banks are also in quite a fragile position. “The country’s domestic banks are likely to see an increase in non-performing loans in what could make the banks weaker and more risk averse. This will hurt credit growth and GDP,” she noted. Stress tests conducted by the RBI at the beginning of the year found bad loans at banks could jump to 13.5 per cent by September 20213 ,up from 7.5 per cent in September 2020. While India is in a broadly healthy position, it is facing some difficult headwinds ahead.

    Abetting investment in India’s capital markets

    Introduced in 2014, the Securities and Exchange Board of India’s (SEBI) Foreign Portfolio Investors (FPI) regulations have made it easier for foreign institutions to participate in the country’s domestic markets. “In the years since SEBI launched the FPI regulations, the rules have been eased incrementally which has enabled a more diverse range of investors to access the market,” said Anuj Rathi, Managing Director and Head of Securities Services India, HSBC. Most recently in 2019, SEBI announced a further simplification of the rules including expedited KYC checks, rationalisation of the number of FPI categories from three to two and the removal of the broad based criteria. Under the rules, Rathi said major institutions including government entities, banks, asset managers and insurers now fall under the Category 1 FPI regime whereas entities like family offices and unregulated fund managers are regulated as Category 2 FPIs. “The sentiment amongst investors in relation to India continues to be very encouraging, where the market continues to improve its appeal as one of the preferred investment destinations,” said Rathi. Again, these market liberalisation reforms along with the decision to set a cap for aggregate FPIs investment in Indian companies at par with sector limits will play an integral role in accelerating FPI flows into India.

    A market with a positive future

    Although COVID-19 has unleashed all sorts of problems in India, the country is emerging from the pandemic stronger owing to its excellent underlying macro fundamentals and solid track record of implementing market reforms. “It has been 30 years since India liberalised its markets in the big bang of 1991. Since then, we have seen a significant increase in FPI and FDI (foreign direct investment) inflows into our diverse industries. As restrictions continue to be eased, I expect foreign investors will increasingly allocate into the country’s budding start-up and digital payments scene,” added Bhandari.

    1 Forbes (June 15, 2021) Leading experts weigh in on growing India’s economy from COVID-19
    2 The Times of India (May 28, 2021) Forex reserves hit lifetime high, rise USD2.8 billion to USD592,894 billion
    3 S&P (May 9, 2021) Indian central bank takes steps to dampen NPL formation amid COVID-19 surge
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