Jefferies sees brighter India outlook as credit, capital flows ramp up; removes HDFC Bank in portfolio revamp

Jefferies sees a brighter outlook for India as bank credit growth reaches its fastest pace in over a decade and foreign equity inflows return, according to the firm. Christopher Wood, Jefferies' global head of equity strategy, highlighted some positives regarding the Indian domestic story in his latest GREED & fear note. The firm has revamped its India long-only portfolio, removing HDFC Bank, India's largest private lender, and Policybazaar-owner, PB Fintech.

In their place, MCX, Lenskart Solutions, and REC are taking over, with REC also being replaced by Bajaj Finance. Additionally, the firm's allocation to Eternal increases by one percentage point, funded by a reduction in Bharti Airtel. Foreign investors purchased a net $2.12 billion of domestic equities in July, benefiting from the unwind out of the memory chip trade, although they remain net sellers for the year, with outflows totaling $25.86 billion.

The most significant signal, according to Wood, is the acceleration in domestic lending, which has climbed to 17-18 percent year-on-year, primarily driven by corporate lending of about 20 percent. Loans to agriculture and retail borrowers are also expanding at healthy rates, indicating broad-based demand. Policy-driven inflows are adding a macro cushion, with the Reserve Bank of India's foreign-currency inflow scheme mobilizing about $41 billion by the end of July, with expectations of reaching $80 billion-$100 billion by the September 30 deadline.

Wood believes that tax cuts on interest income on foreign purchases of government bonds have generated $8.7 billion in net inflows since early June. Consequently, he expects the rupee to stabilize, as it recovered to 95.17 per U.S. dollar by July 31, up from a low of 96.96 in May.