India Stock Funds Attract $4.2B Amid Election Uncertainty

Key Takeaway

• Indian equity funds saw record inflows of $4.2 billion in May, driven by retail investors' preference for higher returns over traditional options.
• Market sentiment is focused on the Federal Reserve's rate decision and India's economic indicators, with speculation around the next Finance Minister.
• The Indian rupee's stability has made it a favorite for carry traders, delivering the best carry performance in EM Asia this year.

Record Inflows into Indian Equity Funds

Inflows into Indian equity funds reached a record high last month, with retail investors showing resilience despite increased stock volatility ahead of election results. According to data from the Association of Mutual Funds in India (AMFI), mutual funds received 347 billion rupees ($4.2 billion) in May, marking the 39th consecutive month of inflows. This surge in investments highlights the growing preference for equity investments over traditional options like fixed deposits and bonds, driven by higher returns.

Monthly recurring plans have emerged as the most popular product among retail investors, contributing nearly $2.5 billion in net flows to stocks. AMFI Chief Executive Venkat Chalasani noted, "While recent data has shown a dip in household savings in India, systematic investment plans have continued to pick up." Additionally, the HDFC Manufacturing Fund, introduced during the month, received over 95 billion rupees in subscriptions, further underscoring the robust investor interest in equity funds.

Market Sentiment and Key Drivers

Following a volatile period marked by exit polls and national election results, investors are now looking forward to a more stable market environment. The new government's formation has shifted focus to key economic indicators and policy decisions. This week, the Federal Reserve's rate decision, along with India's inflation and factory output data, are expected to be significant drivers of market sentiment.

One of the hottest topics among traders is the appointment of the next Finance Minister. Speculation is rife that Amit Shah, Prime Minister Narendra Modi's trusted lieutenant, could take on the role. Shah, who previously managed the home ministry, has faced criticism for allegedly using investigative agencies for political purposes. On the other hand, Nirmala Sitharaman, the outgoing finance minister, is seen as a strong candidate for another term. Despite resisting calls to scrap additional taxes on stock gains, she has been credited with steering the economy to become the world's fastest-growing.

IPO and Block Sales Activity

The Indian market is witnessing a surge in IPO and block sales activity. Bajaj Housing Finance is the latest to join the fray, aiming to raise over $700 million through initial share sales. Large investors, including company founders, have raised more than $14.7 billion in proceeds so far this year. Blackstone's offer to sell $800 million worth of stake in BPO service provider Mphasis Ltd. is the latest deal set to be executed.

Analysts have been adjusting their ratings on various stocks in response to these market activities. For instance, Ceat has been raised to "Reduce" at ICICI Securities with a price target of 2,232 rupees, while JSW Steel has been upgraded to "Buy" at Motilal Oswal Securities. Supreme Industries has been downgraded to "Hold" at Asian Markets with a price target of 5,265 rupees, and Tips Industries has been rated a new "Buy" at Avendus Spark with a price target of 627 rupees.

Rupee's Stability and Carry Trade Appeal

The Indian rupee has emerged as a favorite for carry traders due to its stability and relative inexpensiveness compared to other emerging market currencies. According to Bank of America Corp., the rupee's low volatility and the Reserve Bank of India's (RBI) long interest-rate pause have made it one of the least volatile currencies in emerging markets. "If you hold it for the carry, you don’t have much risk that it will depreciate a lot, which would be a greater risk in some of the other carry trades," said David Hauner, head of global EM fixed-income strategy at Bank of America.

The rupee has delivered the best carry performance in EM Asia, with the one-month implied volatility in the dollar-rupee hitting the lowest in a decade this year. RBI Governor Shaktikanta Das emphasized the rupee's stability, attributing it to the country's sound economic fundamentals, financial stability, and improved external outlook. The rupee's popularity as a carry currency has led to overcrowding in the trade, with institutions like JPMorgan Chase & Co. awaiting better levels to re-engage. Goldman Sachs Group Inc. analysts have also noted that the rupee's carry attractiveness is further boosted when paired with short positions in the euro and Chinese yuan.

Street Views

• Venkat Chalasani, AMFI (Bullish on Indian equity funds):

  "While recent data has shown a dip in household savings in India, systematic investment plans have continued to pick up."