With world markets so jittery, it is worth focusing again on what is probably the best structural equity story globally.

That is India.

Like other central banks, the Reserve Bank of India has been tightening with cumulative tightening of 180bp to 5.4% on the policy repo rate so far in this monetary tightening cycle.

Still this writer is relatively relaxed about the impact of monetary tightening on growth in the specific case of India.

One reason for this is continuing evidence of an upturn in the residential property market. In this respect, India is the exact opposite of the current situation in China, discussed here last week (Can anything stop China’s property meltdown?, 23 September 2022), with all the positive multiplier effects of a new up-cycle in property after a seven-year downturn which lasted from 2013 to 2020.

India is one of the few countries where property prices have lagged income growth in the past ten years or so.

Higher prices and increasing activity in the residential property sector are reflected in the latest data.

Residential property prices across the top seven Indian cities rose by an average 7.7% YoY in 2Q22, the highest growth rate since 2013 (see following chart).

Residential price changes in Top-7 cities

Source: Cushman & Wakefield, Knight Frank

Property registrations in Mumbai and Delhi in August were 39% and 98% higher, respectively, than pre-Covid August 2019 levels.

Number of property registrations in Mumbai

Source: Government of Maharashtra

While annualised new residential project launches in the top seven cities rose to a seven-year high of 469m sf in the 12 months to July.

India residential project new launches

Source: Propequity

Housing Affordability at an 18 Year High

The property market should remain resilient in the face of higher interest rates because of affordability levels remaining at near 20-year highs.

The housing affordability ratio, measured as mortgage payment to income ratio, declined from 53% in FY12 to 27% in FY21 and 28% in FY22 ended 31 March.

India housing affordability ratio

Source: SBI, HDFC

Further evidence of economic resilience and stirring animal spirits is continuing strong GST revenues and buoyant retail sales.

GST collections rose by 28% YoY to Rs1.44tn in August and were up 33% YoY in the first eight months of 2022.

India monthly GST collection

Source: Ministry of Finance

While the Retailers Association of India reported that retail sales in August were 15% higher than the pre-Covid August 2019 level.

It is also a positive that credit growth is picking up with bank loan growth of 16.2% YoY in early September, the highest level since October 2013.

India bank credit growth

Source: Reserve Bank of India

Meanwhile the latest quarterly bank results showed a benign combination of rising credit growth and declining NPLs.

As for evidence of a capital spending cycle, the most recent earnings season was also positive from the standpoint of the industrial sector with order books rising by around 40% YoY for the relevant companies.

Domestic Stock Purchases are the Strongest in Five Years

From a stock market standpoint, this writer has been viewing calendar 2022 as a year of consolidation for the Indian stock market after the strong gains recorded last year, with the Sensex up 22%, and the negative factor of the commencement of a monetary tightening cycle.

Still the market has remained surprisingly resilient even though India will, inevitably, to some extent be correlated to Wall Street though, for now, the Sensex is outperforming the S&P500 and the Nasdaq by 16.8% and 29.7% year to date in US dollar terms even though the Indian rupee has declined by 8.8% against the US dollar so far in 2022.

Sensex in US dollar terms relative to S&P500 and Nasdaq Composite YTD

Source: Bloomberg

Foreigners have also returned as net buyers of Indian equities so far this quarter, buying a net US$7.9bn, after having sold a net US$28.6bn worth of Indian equities in the first six months of the year.

Quarterly foreign net buying of Indian equities

Note: Data up to 23 September 2022. Source: Bloomberg

The reason this wave of foreign selling did not do more damage is because of continuing strong inflows into domestic mutual funds as well as continued buying by retail investors.

Net inflows into equity mutual funds totaled US$26bn in the first eight months of 2022.

Net inflow into Indian equity mutual funds

Note: Excluding arbitrage funds. Source: AMFI

The market’s resilience should be viewed as reflecting the strength of the structural story.

Cheap Russian Oil is Helping India on the Margin

Meanwhile China Covid suppression and the Ukraine conflict have also helped at the margin by keeping the price of oil lower than it otherwise would be while providing India with the opportunity to buy Russian oil at a discounted price.

Russian Urals crude oil is now selling at US$23 below Brent, though down from a US$36 discount in June.

Russia Urals crude oil price spread over Brent crude oil price

Source: Bloomberg

While India oil imports from Russia rose from 0.4m tonnes in March to 3.88m tonnes in July.

India oil imports from Russia

Source: Ministry of Commerce and Industry

All of the above is why further Wall Street correlated corrections in India should be viewed as an opportunity to accumulate in what remains primarily a domestic demand driven economy.

The views expressed in Chris Wood’s column on Grizzle reflect Chris Wood’s personal opinion only, and they have not been reviewed or endorsed by Jefferies. The information in the column has not been reviewed or verified by Jefferies. None of Jefferies, its affiliates or employees, directors or officers shall have any liability whatsoever in connection with the content published on this website.

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