I had the opportunity to visit the Bombay Stock Exchange (BSE) and meet with Piyush Chourasia, Chief Risk Officer and Head of Strategy and Chetan Pithadia, Head of the Financial Institutions Group. This is a storied exchange in the history of India. It was Asia’s first stock exchange, established in 1875. This is a cutting-edge stock exchange, and Mr. Chourasia joked that it is run like a “140 year old startup.” The exchanges accomplishments demonstrate the evolution of India’s financial markets:
- The largest number of listed companies in the world—5,650 as of April 2015.
- The 10th largest exchange in the world in terms of market capitalization and the 10th in terms of equity shares traded.
- The world’s largest exchange in terms of currency options contracts traded.
- The world’s 3rd largest exchange in terms of currency futures contracts traded.
Here are some of the highlights from our discussion:
The Indian market is made up of approximately 35% institutional, 25% proprietary trading desks, and 40% retail. They pointed out that only a small percentage of the total population invests—there is tremendous opportunity for growth.
Indian equity investors have welcomed the May 2014 election of Prime Minister Modi. They estimated that volume has increased by three times since the election. There are high expectations for the government, but reforms are coming.
India has challenges, but it also has great advantages. This includes favorable demographics, with an average age below 30 years old. India has the advantage of having “domestic led growth,” which is more sustainable.
We talked extensively about how foreigners can access Indian markets. My summary is that this has changed dramatically in the last few years, and this is very favorable for international investors.
India is not without its challenges. Infrastructure is lacking. The potential for rising rates in the U.S. will reduce the arbitrage (the Indian benchmark rate is 7.25%), potentially leading to outflows. The Indian Rupee is not fully convertible, which makes it more vulnerable in a crisis.
Rate cuts by the Reserve Bank of India (RBI) have been welcomed by markets. Some are concerned that the June 2nd rate cut may be its last in this cycle. Worries about the monsoon season have created upside risks for food inflation (food and oil are significant contributors to CPI). In recent months, the RBI has announced a new policy of inflation targeting (between 2% and 6%), and upward pressure in the CPI may bring less monetary accommodation. This is weighing on markets in the short-term.
In the long-term, the RBI policy of targeting inflation is very positive for equities. High inflation is always a problem in India. This is emblematic of government transparency and reforms.
Despite the obvious risks, the opportunity is immense in Indian equity markets.
Special thanks to Brennan Staheli, Peter Johnson, and the Lunt Capital team for their contributions to this report.