India: 'safe haven' from crisis

DESPITE the fact that India faces a general election in mid-February, stock markets there have suffered almost no fall-out from the Asian financial crisis. Indonesian and Thai shares have lost 80 per cent of their value in dollar terms since September, but Indian shares have risen 10 per cent.

"India has been something of a safe haven," said a London-based fund manager handling pounds 300m in Asian equities. "The Indian rupee has performed incredibly well in terms of holding its value against the dollar."

MK Khanna, chief executive of UTI Securities in Mumbai, explained why India has been insulated so far: "The Indian rupee is not yet fully convertible, which helps explain why it has not seen major speculative activity. It is also worth noting that, fundamentally speaking, the Indian economy has not been dependent on exports for growth, and Indian companies, which enjoy access to a large domestic capital market, are generally not as highly geared as companies in the rest of Asia."

In the final lap of the electoral campaign, however, the Indian market could become vulnerable. The ruling coalition is seen by most commentators as unlikely to be returned to power.

Meanwhile, finance minister Chindambaram is viewed by international investors as a pro-liberalisation policy-setter. The last budget, passed in mid- 1997, cut taxes, removed various subsidies, and increased the ceiling for foreign ownership in Indian-listed companies. It was widely applauded as reforming.

But the opposition Bhartiya Janata Party, a right-wing nationalistic grouping, is now playing politics with the Asian financial crisis issue. BJP politicians have recently again referred to the damage to India that can be caused by "open" capital markets.

BJP president LK Advani was quoted last week as saying he was suspicious of "short-term oriented" international fund managers. The campaign manifesto committee of the BJP has discussed plans to introduce a "lock-in" period of six months for portfolio investments.

The Indian stock market is relatively small, by developed market standards, but it is one of the larger emerging markets. It is capitalised at $130bn (pounds 76.5bn) compared with $17bn for Indonesia. International investors have approximately $10.5bn invested in Bombay, with another $8.5bn invested in Indian global depositary receipts traded in London.

To date, international investors have discounted the BJP anti-globalisation rhetoric as pre-election breast-beating. The Indian rupee strengthened last week from Rps40.25 to the dollar to Rps38.3 to the dollar, while the Bombay stock market index has been steady at around 3,350.

But this could change if the BJP threat is seen as becoming part of a serious manifesto that includes curbs on international investors, and at the same time, the BJP appears headed for victory in the polls.

Most opinion in India points to another coalition government, with the BJP as the largest single party. The elections will be held from 16 February, and results are unlikely to be finally known in this mammoth democratic exercise until the first week of March.

q Gianluca Ricardo is the pseudonym of a City financial executive.