India’s strong performance means that it is already widely held in investment portfolios. India makes up 15% of the MSCI Emerging Market index, half the weight of China and almost three-times the weight of Brazil. Still, Indian equities are trading around 30% higher than their long-term averages, or 21-times forward earnings, significantly higher than the broader MSCI World index. Consensus expectations point to growth in earnings of more than 15% in both 2023 and 2024. At the sectoral level, India will continue to benefit from its strong industrial focus on digitalisation. However, Indian equities’ valuations remain high for now, and so look less appealing.

With interest rates at 6.25% in December, and one more hike expected early in 2023, India’s government bonds look attractive compared with other emerging sovereign debt in local currency. High carry yield and an investment grade credit rating of ‘BBB-’ from Standard & Poor’s, mean India’s bonds may see rising levels of foreign interest. Inclusion in major bond indexes would boost their attraction further. At this stage, we prefer shorter-duration Indian sovereign debt, while longer-duration bonds may look more attractive later in 2023.

The Indian rupee has depreciated against the US dollar, from around 40 rupees in 2005 to around 80 rupees today. This is largely due to India’s higher inflation rate compared with trade partners. In the months ahead, the rupee is unlikely to benefit directly from China’s reopening economy, since higher commodity prices will keep India’s current account deficit wide. Any external inflows into equities will be countered by the central bank re-building its foreign currency reserves. The RBI will look to prevent any spikes in the dollar-rupee exchange rate, to keep the Indian currency high yielding, with lower volatility than many of its emerging peers. We see the currency trading in a range of 80-84 rupees to the dollar over the next 12 months.

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