Attractiveness of Indian Equities

Attractiveness of Indian Equities  

Analysing strength of Rupee first

·         The level of our currency depends on many factors but the two most critical factors are fiscal deficit and current account deficit

·         Fiscal deficit is the difference between what your government earns and what it spends .

·         India being a growing economy and also due to lots of social benefit schemes spending has always been on rise  .

·         Earning is taken care by Taxes + Borrowings in case of shortfall

·         If Spending > Earning and taxes are not able to compensate then more borrowing by Government

·         More borrowing means more pressure on payment and when you borrow a lot, your credit profile in the outside world goes down thereby rupee at times become weaker .

·         Current account deficit is the difference between what India exports and what India imports.

·         Our imports have always been higher than exports, resulting in high demand for US$

·         The twin impact of high fiscal deficit and high current account deficit resulted in high demand for US$ and kept the Indian Rupee under pressure .

Will Rupee expected to get Stronger from its present level next 5 years ?

·         Over the past three years, India seems to have solved both the above mentioned problems

·         India’s fiscal deficit has reduced by ~Rs. 1,50,000 crores over last two years because the current government is spending less and earning more . The current government has made the previous government populist policies more efficient by bringing transparency and accountability in operation ..

·         On the revenue front, India’s tax collections grew at 18% in FY17, the highest in last seven years. Most of the gains due to declining oil prices .        This government’s relentless focus on tax compliance has also helped (demonetization was one of the many steps in this direction).

·         The current account deficit  problem has been solved through structured control over gold import , incentivising domestic physical gold savers  by offering various financial products like gold bonds and ETFs.  India’s import bill has reduced by more than Rs. 400,000 crores or US$61bn.  Thus, India needs far lesser US$ now than two years back. It’s only natural that Indian Rupee should

become stronger.

·         This indicates strength of Indian economy .

How can you benefit from this trend of strong rupee?

India seems to be more stable economically in a relatively unstable world economy.

·         FIIs inflows in Indian equities has been phenomenal ( US 40 billion last FY ) . They hold approx 25% on Indian equities vis a vis 15% held by domestic mutual funds . It seems they have confidence in Indian equities .

·         Domestic investors savings moving to equities and not in real estate and Gold . Declining FD rates also motivating investors to go for equities .

History  --  Past 10, 15 years Indian equities have given one of the best return

Present  -- A stable Government trying to control corruption ( subsidy directly to bank account , demonetisation ), increase in taxation ( , proper allocation of resources , economic reforms ( GST )

Future – Strong consumption pattern, focus on self reliant economy etc will boost growth and economy thereby more return through Indian equities . Risk from equities can be minimised by investing in good equity mutual fund products .