September 8, 2021 India: Strong Inflows To Benefit INR - mellon bank benefit disbursements

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September 8, 2021
India: Strong Inflows To Benefit INR
Resilient Indian Excessive liquidity Inflow likely to benefit
economy with both surplus warrants fine INR. Underheld and
manufacturing and tuning and might have profitable INR
services PMI back into slowed RBI positioning are
expansion zone intervention supportive
Despite the ongoing COVID-19 concerns in India, with new cases reaching over 30,000 a
day, and the relatively low vaccination rate of less than 40% of the population having
received at least one dose of vaccine, the Indian economy and overall sentiment has been
incredibly resilient.
India manufacturing PMI plunged in June to 48.1 but recovered swiftly to 52.3 in August. A
similar rebound was recorded in services PMI, which saw three months of contraction
(sub-50 readings) before sharply rebound to 56.7 in August. At the same time, Q2 GDP
and July exports growth posted strong reading at 20.1% y/y and 49.9% y/y, respectively,
helped partly by base effects.
The resilient macro profile has provided a positive backdrop for equity markets. The Indian
Sensex index posted over 9% gains in August and its valuation, measured by one-year
forward PE ratio at 23x, is higher than the 21x recorded in the S&P 500, making Indian
equities one of the most expensive stock indices in the world (see chart).
The red-hot equities market is thought to be driven by IPO activity, flush liquidity
conditions and has been further boosted by stellar earnings growth.
The Indian economy remains resilient despite
ongoing pandemic concerns
Indian Equity Valuations At Historical High
Source: BNY Mellon Markets, Bloomberg L.P.
Further mopping up of liquidity is likely with
unprecedented liquidity surplus
Various Reserve Bank of India (RBI) liquidity enhancing measures, ranging from G-sec
acquisition programs (G-SAP 1.0 in April 2021 and G-SAP 2.0 in July 2021) to extended
on-tap targeted long-term repo operations (TLTRO), has led to unprecedented excess
liquidity in the banking system, estimated at over INR 10trln as of early September,
compared with averages of INR 6.5trln and INR 8trln in July and August respectively.
Indeed, such phenomena can also be seen in the sharp drop of the overnight MIBOR
levels close to the official RBI's reverse repo rate (see chart). The excess liquidity has
prompted the RBI to conduct additional variable-rate reverse repo (VRRR) operations in
September, in addition to the pre-announced fortnightly VRRR operation.
Aside from strong deposit growth, RBI's FX intervention (buy USD, sell INR) is a potential
contributor to excess liquidity in the system. Interestingly, there is little signs of RBI FX
intervention, according to a Bloomberg estimate or from Indian FX reserve data,
suggesting the recent strength of INR is largely inflow related.
Note that Indian FX reserves for August were marginally lower when excluding the $18bn
liquidity boost from the IMF by way of Special Drawing Rights.
Excess Interbank Liquidity in Indian Banking System
Source: BNY Mellon Markets, Bloomberg L.P.
Recent inflows into currency, equity and fixed
income space likely to continue
According to the official foreign investment inflow (FPI) data, India has received over $7bn
of inflows into equity markets year-to-date, but a net outflow of $1.2bn year-to-date in the
fixed income space.
It is also worth pointing out that August saw the first monthly inflow into Indian fixed
income this year and this trend has continued into September. The $1.8bn inflow is as
large as the sum of outflows over the previous five months from March to July.


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