This article is a guest contribution by American Century Investments.
Over the past few years, India has moved forward with market-oriented economic reforms such as reductions in tariffs and other trade barriers, the modernization of its financial sector, major adjustments in government monetary and fiscal policies, and more safeguards for intellectual property rights. In a move to reform its economy and boost double-digit growth, India—Asia’s third largest economy—is now planning to open equity markets to foreign retail investors.
The Financial Times reported last week (“India Eyes Foreign Retail Share Investors,” August 9, 2010) that a panel set up by the government to explore ways of bolstering foreign capital inflows had recommended making it easier for foreigners—particularly wealthy foreign nationals of Indian origin—to buy shares on the Indian exchanges.
In the article, Ashvin Parekh, a partner at Ernst & Young in Mumbai, who has also been working with the finance ministry on the project, said that “the finance ministry has accepted the recommendations in principle as it wants to capitalize on India’s incredible growth by attracting more foreign investors.” The move to open up the country’s equity market to retail investors abroad had been passed on to India’s market regulator and central bank, which would have to create a framework to protect investors’ interests.
About 18 years ago, foreign institutional investors were first allowed to invest in India. Now, foreign-owned brokers are common and trade directly on the country’s exchanges, while individual investors are prohibited from such practices. The plan to open up equity markets to foreign markets comes as India’s exchanges are upgrading technology in a bid to lure high-speed, computer-driven trading that accounts for a large proportion of activity on U.S. and European stock exchanges.
India’s government is also reportedly seeking to raise about $5 billion by selling minority stakes in state-owned groups, including Oil India and Coal India, and as investors eye India for higher financial returns. Over the past six months, India’s equity market has drawn much foreign institutional investor cash. In addition, the economy has grown 8.5% on the back of strong domestic demand and abundant liquidity, thus outperforming large emerging market rivals.
In the first seven months of 2010, foreign institutional investors have poured approximately $11 billion into Indian equities (see chart below), compared with about $7.5 billion during the same period last year. Analysts expect inflows for this year to top the $17 billion record hit in 2007.
Source: The Financial Times
More Growth Potential for Investors
While opening up its equity market to foreign retail investors will likely benefit India and increase capital inflows in that country, there is also more growth potential for investors who are prepared to accept the risks and invest for the long term.
Over the past decade, the economies of emerging market countries like India have been more dynamic and faster growing than the developed world. Maintaining growth and stability is certainly a top priority for emerging market countries like India. Compared to when emerging markets funds were first listed some 20 years ago, the asset class is also better regulated and offers more transparency due to improvements in the legal and financial systems. Many economies such as India have also built up their foreign exchange reserves, which allows them withstand market turbulence from developed economies. Moreover, sound macro fundamentals and stimulus measures helped the country weather the recent global financial crisis.
Over the next five years, we also believe that India and emerging market economies will be driven not only by export demand from the rest of the world, but by growth in domestic consumption, including health care, technology, infrastructure, and finance, among others. Accordingly, we think that this will create huge opportunities for investors and companies doing business in these sectors.
Investment return and principal value will fluctuate, and it is possible to lose money by investing.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.
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