India Luring Investors Post Moody's Upgrade

NEW YORK (TheStreet) -- Moody's (MCO) upgraded India's local currency sovereign rating from Ba2 to Ba1 based on economic officials' conscious efforts toward its recovery and efficient fiscal reforms. This move would lead to increasing capital inflows and appreciation of domestic currency.

The United Nations Conference on Trade and Development, or UNCTAD, said in a report that India stood ninth in the top 10 destinations for foreign direct investment in 2009; it was in the 13th position in 2008. According to EPFR Global data, for the week ended July 21, 2010, foreign fund inflows into India touched a 51-week high at $187 million, as investors were cautious on developed markets and an attractive Indian earnings season lured inflows into the economy.

Recently, UNCTAD said that India would emerge as the third-largest recipient of foreign direct investment for the three-year period ending 2012 and also as the most promising investor country in 2010-2012.

Separately, India's prime minister, also an economist, said that inflation would ease to 6% by December 2010 as a normal monsoon is likely to cause a surge in supplies of summer-sown crops, thereby leading to a drop in food prices. Meanwhile, assuming current monsoon levels, agricultural output is estimated to be much better than last year.

On similar lines, the federal reserve of India, being more committed toward an easing inflation rate, raised its key policy rates for the fourth time in a year, in order to curb rising prices in a recovering economic scenario. The central bank increased its repo rate by 25 basis points to 5.75%, while the reverse repo rate was hiked by 50 basis points to 4.5%.

Meanwhile, the cash reserve ratio is unchanged at 6%. In addition, the economic growth rate target for fiscal year 2011 is now raised to 8.5% as compared to the earlier estimated 8%. As there were no disappointing changes, the Indian markets ended the trading flat with a positive bias.

Sectors like banks and auto have performed significantly well in the Indian market, with returns of 36.9% and 47.5%, respectively, over the past year. During this period, Tata Motors ( TTM), HDFC Bank ( HDB) and ICICI Bank ( IBN) have gained 81.8%, 62.9% and 25.4%, respectively.

Meanwhile, the information technology sector has performed exceptionally well during the current earnings season. For the longer run, analysts have upgraded the stocks subsequent to reporting strong results for the quarter ended June 30, 2010.

Emerging market economies on the whole have performed better in comparison to developed economies over the past two years. According to data from the World Federation of Exchanges, in the past two years the value of equity trading in developed markets slumped 36% and trading volumes narrowed by 8%. However, during the same period, trading in emerging markets surged 18% and volumes soared almost 67%. In the past one year, emerging markets equity trading was up 11%.

Among the emerging market countries, Latin America has been the best performing region. Primary reason for emerging markets to fair better even in a recession scenario is that these economies are less dependant on financial services and more on real economy sectors like natural resources, manufacturing and exporting.

Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

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