Investing In India: Who Should Replace Raghuram Rajan?

In line with other global currencies, the Indian Rupee (INR) rose against the U.S. dollar after a third day in a row of slides, due mostly to Raghuram Rajan’s exit but also because of the uncertainty surrounding Brexit. For today the Indian markets have stabilized, though I am sure that the uncertainty will add volatility until Rajan’s replacement has been selected.

In the meantime, the Indian economy is firing on all cylinders. Ken Rapoza of Forbes magazine, with whom I had lunch with last week, has recently returned from India and is duly impressed by the excitement in the air. Indians are now purpose-driven; a bright future awaits them and that future is available in India.

Political hurdles remain, but as time passes, the Congress Party is losing its relevance and being swept into the gutter with the rest of India’s rubbish. BJP hopes for a clean sweep in the latest state elections did not materialize, but unaffiliated local parties have won and are willing to work with the government for the good of the country.

In West Bengal, that powerhouse known as Mamata Banerjee said, “I am politically opposed to the BJP government. But it doesn’t mean I would block the passage for the pro-people bill. Why some parties are unnecessarily being politically vindictive and blocking the bill?”

A very good question. Unfortunately, the one economic policy that would benefit India greatly, the GST, has been blocked by the obstructionist Congress Party in the Rajya Sabha, but new alliances can overcome that. Prime Minister Narendra Modi still remains very popular and an article from CNBC titled “Citizens mostly satisfied with govt’s 2-yr performance: N18 poll” details the findings of an exhaustive recent poll. To me, the most overwhelming number was that 90% of those polled believe that India’s stature has grown internationally. 68% believe that Modi will deliver on the rest of his election promises before 2019.

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With those sorts of tailwinds, there is no doubt that Modi will be reelected for another five-year term. The architect of the 2014 victory, Amit Shah, has said that the results of the 2019 election will dwarf the prior one. This has to be a source of confidence for the foreign investor. The long term prospects of an Indian economic powerhouse are still intact regardless of what some in the West may say, or hope for.

As reported by the Economic Times, brokerage houses such as Credit Suisse, Merrill Lynch, and Nomura have informed their clients that the overall India story remains intact. Yes, there will be volatility in the Indian equity and debt markets in the short term, but this can be truncated by Modi naming Rajan’s successor very quickly.

If you remember, I had asked my friend Dr. Rabikar Chatterjee who he would nominate if the decision was his. His choice? Gita Gopinath, a professor of economics at Harvard University. And after a quick look at her resume, I totally agree.

Dr. Gopinath is young, dynamic, very well educated, and very intelligent. She would be immune from the vitriol of Subramanian Swamy because she teaches at his alma mater, so she has to be considered Indian. Among her most important qualifications is being on the economic advisory panel for the Federal Reserve Bank of New York. But what nailed it for me was this glowing article in the Harvard Gazette written by Corydon Ireland. So, Mr. Modi if you’re reading, Gita Gopinath is, in my opinion, just the sort of person that India needs right now.

Now on to the sectors and stock picks that I believe will benefit from the government’s recent changes in FDI policy. The five sectors I am going to be looking at are consumer products, banking and finance, infrastructure, transportation, and pharmaceuticals. One other sector that is of great interest to me, and one that I believe will be a major driver of the Indian economy, is Fintech. But I will leave that to another day, because it deserves an article all to itself. ITC Ltd. (ITC), which is part of a larger conglomerate, has a diversified presence in India with products ranging from cigarettes to hotels and is my choice in the consumer products sector.

Banking and finance has a lot to choose from, but I will limit my choices to the private banks and not venture into the public sector banks as they have inherently held back the sector index due to their mismanagement and corruption. My choices are Kotak Bank (KMB), an exceptionally well run company and a bank with an aggressive growth plan including the U.S.; Axis Bank (AXSB), another well run bank; and YES Bank (YES), which has experienced explosive growth over the past few years. I have not included some of the old warhorses such as ICICI and HDFC here, as they have been given extensive exposure over the years.

In the infrastructure sector, the only company that I can justly invest in is the oldie but goodie Larsen Tubro (LT).

In the transportation sector, my choice is a company that was started by a Malaysian entrepreneur of Indian origin, Tony Fernandes. Since its inception in 2006, this company has expanded dramatically across 22 Asian nations. The reason I include them in an article about India is that since FDI limits were raised earlier, the company has partnered with Tata to launch Air Asia India to provide low cost air travel across the country. Look for other carriers to follow suit. Air Asia (AIRA), traded on the Malaysian Stock Exchange, has an equally inspiring YTD return of 106%.

Now let’s move on to the sector that will experience explosive growth now that FDI limits have been raised to 100%: pharmaceuticals. Aurobindo (ARBP) the maker of simvastatin, Dr. Reddy’s Labs (DRRD), Sun Pharmaceuticals (SUNP), Biocon (BIOS), and Cadila Healthcare (CDH) are companies that in my opinion will be able to take advantage of the new FDI rules.

As things begin to unfold in the relaxation of the FDI rules, I may be able to point to other such investment opportunities. So, with Modi at the helm, the possibility of an economist like Gopinath as Central Banker, and the relaxation of FDI restrictions, India has a chance to be the brightest star in a universe cluttered with other stars.

In an upcoming article I will discuss how I am taking advantage of the new rules which will benefit from the world of Fintech. Until then, treat yourself well.


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