When Moody’s boosted India’s rating on January 21, it added fuel to a stock market already breathless from its steep climb last year. Citing India’s strong external payments position and progress on peace talks with Pakistan, the rating agency raised India’s long-term foreign currency rating to investment grade; India still has a non-investment grade ratings from other agencies.
India’s economy is expected to grow at around 7% in the fiscal year to March. Forex reserves are at a record $103 billion. The rupee is rising steadily against the US dollar and foreign portfolio investors pumped in $6.7 billion last year, pushing the benchmark Sensex up over 100% since May 2003.
Hoping to reap the political rewards of a healthy growing economy, the Indian government is set to announce national elections early this year. Prime minister Atal Behari Vajpayee told a meeting of businessmen on January 12 that he hoped a new government would be in place by April this year.
The cryptic response of finance minister Jaswant Singh to the Moody’s upgrade was “better late than never”, adding that it should help Indian companies lower their cost of borrowing. Singh has done his bit for them. He lifted the lid on a host of capital controls early last month that will allow Indian firms to make bigger foreign acquisitions and help them borrow more offshore. He also raised the limit on foreign investment in private banks to 74% and erased the foreign direct investment cap in the petroleum sector.
Aijaz Ahmed, chief investment officer of HSBC Asia Pacific, says: “We know how FDI helped provide capital to China and the government’s moves to open up builds a positive picture of continuing reforms for India.” Earlier, the market regulator announced that brokers can offer clients margins on which to trade and that they can borrow and lend stocks from this month.
Not all the news is good though. The long-awaited easing of the FDI limit in telecoms companies to 74% was put off once again. That will disappoint Singtel, a partner in Bharti Telecom, and Hutchison Whampoa, which has plans to list its Indian company in the local markets. Also, there is a catch in the new rules for FDI in private banks. Potential acquirers can take over a private bank only if total foreign investment, including foreign portfolio investment, does not exceed the new 74% limit.
Note of caution UR Bhat, head of equity at JPMorgan Chase, is cautious about the continued prospects for the Indian economy for two reasons: a sustained step-up in economic growth needs bigger investments in infrastructure than appear to be on the cards today; and a strong government is needed that can reform boldly.
Indian companies have a lot to cheer about. The only limit on the size of foreign acquisitions they can now make is their own net worth. The Moody’s upgrade will lower offshore borrowing costs. The new rules on foreign borrowings remove most of the restrictions imposed in November. Five-year borrowings can be up to $500 million, 10 times the earlier limit. The cost at which foreign money can be borrowed is raised to 200 to 350 basis points over Libor from 150bp to 300bp earlier, allowing a larger number of Indian companies access. End-use restrictions have gone, except for investment in real estate and the capital market.
Loan and bond offerings of around $1.5 billion by Indian names are expected by March this year, including a $750 million bond by petrochemicals and telecoms conglomerate Reliance Industries and deals for state-run National Thermal Power Corp and Industrial Development Bank of India.
The government has also lined up large divestments in February and March. Disinvestment minister Arun Shourie announced that minority stakes of 10% each in two listed state energy companies – Oil and Natural Gas (ONGC) and Gas Authority of India (GAIL) – will be sold in early March. Local investors reaped handsome profits after Shourie took a shrewd decision last May to enlarge the number of shares to local investors in the divestment of car-maker Maruti. The price of those shares has reached nearly three times the issue price.
Budget deficit bridge hopes The government hopes to earn a similar political dividend from the sale of ONGC and GAIL shares worth close to $3 billion. Remaining government shares in privatized companies such as Indian Petrochemical (IPCL) and Indo British Petroleum (IBP) are also likely to be sold. The money raised will bridge the large deficit in the budget this year after privatization sales of two oil companies, HPCL and BPCL, were pulled following a court restraint.
The success of these share sales and many others lined up by private companies will hinge on how well the stock market holds up. The market turned volatile in late January, falling almost 10% on rumours of a possible ban on offshore investors using participatory notes (P notes), which are offshore derivative contracts based on underlying Indian shares. Last year the regulator began seeking information on the identity of P note investors on suspicion that hot money was being pumped into the local markets.
On January 23, the regulator clarified that from February 3 2004, P notes must be issued only to regulated entities, or investors regulated in their home markets. Notes that have been issued to unregulated entities, however, need not be terminated immediately but must be wound down in five years. This, it hopes, will keep Indian companies routing illegal money into the market as well as unregulated hedge funds out of the local market. The market seemed positive, rising smartly on the news of the Moody’s upgrade and the regulators’ statements on P notes.
