A few days back it was only a threat from global rating major Moody’s that India’s credit rating may be downgraded due to the falling rupee. However, Goldman Sachs Group Inc on Wednesday downgraded India to ‘underweight’ from ‘neutral’. The global financial major said it is looking for “clearer” growth signs to turn “constructive” on Indian equities.
RBI’s measures
Recent data have been sluggish with no signs of a pick-up in investment demand. The external funding environment has also turned challenging causing the RBI to tighten liquidity, the report said.
In a series of measures aimed at arresting the fall of the rupee and check volatility in the currency market, the RBI had directed banks to draw only 50 per cent of their total deposits on overnight borrowings and maintain 99 per cent average cash reserve ratio everyday.
Goldman Sachs said in its report that investment case for India has turned less favourable and growth recovery looks elusive, macro vulnerabilities are rising and positioning remains extended. “We see further earnings cuts and limited room for re-rating,” the report added. The overall earnings sentiment remains weak, notably in the investment cyclical and capex-related sectors, it said.
As sales growth moderates further and margins remain under pressure, Goldman Sachs reduced its 12-month target for Nifty to 6,200 from its earlier expectation of 7,000.
Very little foreign selling has occurred in Indian equities relative to the massive foreign inflows over the past few years.
We see increasing risk of a potential “flow reversal” in equities, particularly in “crowded” financials, Goldman Sachs analysts led by Sunil Koul, said.
According to Axis Capital estimates, foreign institutional investors currently control 21.8 per cent of Indian equities, which is a record high. It, however, added that polarisation has increased, with the number of stocks with record high FII holding declining to 12, compared with nearly 18 in the last two quarters.
According to SEBI data, FIIs have pumped in about $10.8 billion so far this calendar year into Indian equities through secondary market transactions. However, foreigners sold a net $7.6 billion of domestic debt in the last two months.
badrinarayanan.ks@thehindu.co.in