India has faced many tough situations. However, its inherent long-term resilience due to a structural micro story; low-hanging macro policy reform opportunities; and the improving standards of regulatory governance; have ensured that India has always recovered from a crisis. In fact, as the ex-RBI Governor, Raghuram Rajan, remarked in his maiden speech as RBI governor, the words, 'India' and 'Crisis' should never be used together in a sentence.
Be it a situation driven by India's self-goals: 1991, 2000, 2013, 2016-2018 or driven by external events: 1998, 2008, 2020; India has always been, much to James Bonds' chagrin, 'Stirred but not Shaken'.
India Real GDP has averaged above 6% for the last 40 years
(Source: loksabha.nic.in, world bank, RBI)
The fact that during the last 40 years, the Indian Real GDP growth has averaged above 6% is a testament to this. In the last 20 years, India's Stock indices have returned 2x over the US and grown much more over EM, and China to the dismay of the many who have remained under-allocated to India.
Under Allocation to India has hurt Investors
(Source: Datastream, Re-based, 20 year Data till February 2022, in USD)
India has seen relative underperformance in 2023
(Source: Equities = MSCI Indices, Currency against USD, Bonds – local currency ETFs )
India is also at about its long-term average interest rates. Indian companies, financial firms, households and investor are used to dealing and managing with interest rates around the 7%-8% level. This is different in the western world. Current interest rates are so much higher than levels seen in the last 15 years.
Indian bond yields are back at its 20-year long-term average
(Source: Datastream, 10 year bond yields)
Yes, India is chaotic; it is a democracy; has corruption weeded in its governance; and has underachieved. However, in the chaos is the opportunity; in its democracy is the checks and balances; in its corruption is the clean-up; and India thus continues to disappoint the optimist and the pessimist.
India suffered from the stock market scams of Harshad Mehta (1992), and Ketan Parekh (2000) and lost the trust if retail investors. Retail shareholding fell from 11% in 90’s to below 5% in early 2000s. However, India learnt enough to eventually build a truly world-class stock and bond market trading and settlement system.
The mutual fund busts in CRB (1996) and UTI (2003); the rampant mis-selling in the early 2000s; the liquidity and credit episodes of (2008, 2013, and 2018); has meant that regulations are now better than the best leading to retail investors returning in droves.
Indian Retail Investors are allocating to Mutual Funds as foreigners sell
The recent Adani issue, given its size and scale, in an earlier world should have had an impact on the entire market. However, given the maturity of institutions and regulations, it caused a ripple but there were no system-wide issues. The issues raised on the Adani group were well known and the regulator should have acted earlier. However, I am sure, SEBI will tighten the regulations to maintain the sanctity of the capital market with expected corporate governance standards.
The Indian insurance and pension industry though given the relative lack of investor-oriented reform has had continued issues with mis-selling; higher costs and a lack of professional investment philosophy. It is clearly losing out to other forms of investment.
The RBI having suffered the shame of having to pledge its Gold in 1991 managed the 1998 and the 2008 external crises with prudent regulations. They seemed to have lost control when India was part of the fragile five in 2013, but with external and monetary policy reforms has regained its credibility.
India was part of ‘Fragile Five’ in 2013, Will it be now be ‘TINA’
(Source: Datastream, rebased in 2011)
India went through a bad asset quality cycle between 2014-2020 impacting the financial sector and culminating in a credit crisis that accounted for a few banks, shadow banks, and mutual funds.
The 2018 IL&FS solvency issue was India's 'SVB' bank event. India initially dilly-dallied on the resolution of these firms but with the threat of contagion, it moved to either re-capitalize, shut down, sell, or resolve the impacted entities.
Bank and Corporate Balance Sheets are mending
(Source: CMIE, Annual Data, ending March 2022)
The RBI's macro-prudential regulation now is almost similar for a bank or non-banking financial firm; large or small. Indian banks also have limits on wholesale funded deposits to prevent consolidated bank runs. India follows Basel-3 norms on capital adequacy. Learning from the 2013-dollar funding crisis, it now requires all external corporate loans to be hedged or provided for with capital buffers. The RBI sensing the impact of rising interest rates on bank profitability allowed the banks a higher HTM limit for a 2-year period to absorb the increase in fiscal borrowing. SVBs major issue stemmed from the impact of higher rates on its balance sheet.
India's financial system held up well during the COVID crisis as well. One particular reason is the large presence of Public Sector Banks (PSBs). Though it has impacted credit creation and they were also responsible for bad lending and poor asset quality, the PSBs go a long way in restoring depositor confidence and aiding in financial stability. As we saw, the government re-capitalized many PSBs over the last 5 years. It was also always a PSB that has come forward to rescue a failed private sector bank.
India should improve their quality but should always ensure that a third or more of the banking system belongs to PSBs.
The lesson to learn from the SVB crisis though is the speed of the resolution. India now has a bankruptcy code to deal with corporate failures. It needs a financial resolution code to quickly deal with financial firm failures.
Finally, the main resilience comes from the Indian households(HHs). Household debt though rising is well below global averages. Also, the Indian household is a smart asset allocator. About 50% of the HHs is land/property; about 30% is cash, deposits, and insurance; another 15% is in Gold. These are stable long-term assets as compared to volatile stocks and mutual funds.
India Households are smart Asset Allocators!
(Source: Jefferies Research)
This is of course not a complete picture, as the bulk of the HHs does not have any disposable incomes to save in this manner. But for those who do, this represents a decent balance between their income and spending.
These very HHs and small businesses have also prevailed despite severe shocks in recent years starting with the disastrous decision to demonetize 86% of the currency; they have adapted to the cumbersome GST compliance; withstood the credit shock and survived the Covid-19 pandemic.
India has its frailties and its share of disappointments. But in a world of uncertainty, India does its own thing and provides a predictable outcome for those willing to use a sensible approach.
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