India’s banking strength pushes economic boom

India is strengthening its position as the fastest-growing economy among the Group of 20 nations, surpassing China since 2015 with a boost from a financial industry that is winning the confidence of global investors.

Financial markets are improving standard of living by channeling savings, allocating credit and reducing the cost of producing and trading goods and services. In India, the financial industry now accounts for 36% of the country’s publicly traded companies, which is an increase of 11 percentage points during the past five years and also highest when compared with any of the global peers.

That helps explain why economists are predicting that India’s gross domestic product (GDP) will expand 0.5 percentage point faster than China’s this year, 1.1 percentage points faster in 2018 and 1.6 percentage points faster in 2019, according to data compiled by Bloomberg.

India’s financial firms not only produced the best total return (income plus appreciation) of any industry—10%, through the first six months of 2017; they also beat the emerging market equity benchmark by the most when compared with 10 industries measured in US dollars, according to data compiled by Bloomberg. The exceptional performance coincides with strengthening and improving currency stability.

This makes it more attractive for traders to borrow in the US at a low interest rate i.e. 1.3%, and convert their dollars to rupees by buying the rupee; which then can be loaned at a higher interest rate of 6.3%. The higher interest rate compared with the other countries works in favor of the measure of this so-called carry trade adjusted for currency stability, the Sharpe ratio, favors India the most among the 31 most-traded currencies.

So far this year, Foreign Portfolio Investors (FPIs) have net bought USD 16.1 billion and USD 8.4 billion of Indian debt and equities, respectively, which has led to an appreciation of the Indian rupee and has made it one of the strongest gainers among Asian peers.

India is also witnessing a growth in Mergers and Acquisitions and IPO activity. India’s growing appeal to global investors is evident in the market for mergers and acquisitions. The country was involved in $164 billion or 3.3% of all global merger activity in 2016 growing from the $42 billion, or 1.5% share, of five years ago. India also accounted for $11.5 billion, or 3%, of the global market for initial public offerings last year, up from 1.3% in 2012, according to data compiled by Bloomberg. 

The biggest winner due to this is the Indian Banking Industry. Indian companies also sold a total of Rs. 110 crore of debt this year, or 1.4% of the total comparable bonds issued worldwide. Five years ago, the ratio was only 1%.

“India is becoming one of the favorite markets in the Asian fixed-income space and has already attracted some of the world’s largest money managers as per the source from Bloomberg News. 

Though the Banks are witnessing increase in the Non Performing Assets (NPA), that ratio still is well below India’s emerging market peers Brazil and Russia, as well as many countries in Europe. Also, there are positive measures being implemented to reduce the same.

Market experts expect one risk to be mitigated soon: the chance of rising interest rates. The reason being falling inflation rate which could nudge the RBI to reduce the interest rates. Also, the market for interest-rate derivatives shows there is a 67% chance that the Reserve Bank of India will cut the benchmark lending rate in August. The probability based on market bets was 18% two months ago, according to data compiled by Bloomberg.