Ridham Desai Says Three Reforms Make Indian Markets Resilient To Global Crisis

Even though the ongoing global crisis should not be discounted, Indian stock markets are more resilient on the back of three key reforms, according to Ridham Desai of Morgan Stanley.

"It is a very tough world. We should not be complacent about it at all," Desai, managing director as Morgan Stanley India, said during a session—titled 'The India Decade'— at BQ Prime's Future Today Summit. "20% of India’s GDP comes from abroad… it is a very large number contrary to popular perception that India is a domestic economy."

"If that export growth goes away, it will have an impact on capex, on domestic growth," he said. "We have to worry about the war because that can bring inflation to us, especially fertiliser prices, which are very rich compared to where they were three years ago. But I think we are well placed."

Historically, every U.S. recession in the last 30 years has brought a bear market in India and that is because India was overly reliant on capital market flows to fund its deficit, Desai said.

"We are far less sensitive from a stock market perspective," he said. "The economy will still suffer a little bit."

Participants at BQ Prime's Future Today Summit were unanimous in their opinion that Indian markets won't escape the impact of looming recession in the developed nations as central banks increase rates to tame runaway inflation. Yet, most of them were confident of a rebound despite the macro slump.

According to Desai, In India has seen three major reforms that have bolstered the domestic markets in the past seven to eight years.

"We allowed for the first time in 2015 retirement and pension funds to invest in equities," he said. "It started with a very humble 5% number, and today it's at 15%, it probably is going to go to 25% in the next few months." That has triggered a $2 billion buy from retirement funds every month, creating a domestic pool of risk capital, Desai said.

"Emphasis on FDI has completely altered India’s ability to withstand oil prices, U.S. recessions, and a relatively independent monetary policy," Desai said. "We no longer rely on FPIs to fund deficits. As you can see in the last quarter’s BoP numbers, we surprised on the upside."

Right now, India is the only place on the planet that can absorb FDI inflows to the tune of $100-200 billion, the market veteran said.

"The third change is the emphasis on corporate profits. The government came one fine morning and cut corporate tax rates and, through the Covid period, has not lost focus that the deal is to boost corporate profits so that they can invest," Desai said. "We are in the cycle where we should get pretty healthy profit ratios to GDP, we’ll probably go past 7% in the next 3-4 years."

According to Desai, emerging and Asian markets will soon bottom out. "Once Asian stock markets bottom out, Korea and Taiwan will lead the charge…," he said. "And if those markets go up 30-40% in the next one year, then India will underperform."

The foreign investors, however, will then find multiples "attractive".

Desai expects a loan boom to soon happen, considering how underleveraged Indian companies are, provided no significant untoward events rock the global economy.

"We were dealing with Covid," Desai said. "Utilisation rates will have to go up and companies will have to feel that their growth prospects are getting better, and it takes time."