India: Key Sectors

Background:

India's debt market is less liquid, has restrictions on foreign investment and India runs a high fiscal deficit. Instead, the equity and real estate markets are more attractive for foreign investors and offer high returns. Private equity investment is also a platform to invest in India, especially in real estate and infrastructure, as the 2008’s market correction has made valuations attractive. In the stock market — energy, real estate, Information Technology (IT), banking and infrastructure sectors — are usually the top performers and foreign institutional investors are heavyweight in these sectors. While high valuations are a concern, these sectors are attractive from a medium-term perspective. High returns have attracted Foreign Direct Investment (FDI), institutional investors and Joint Ventures into real estate in the recent years. Given restrictions on foreign investors to participate directly in real estate, such as investment caps, it is best to invest in real estate stocks. India follows a managed float currency regime with partial contols on the capital account. Capital inflows, attractive equity and real estate markets and global liquidity boom have led to appreciation pressure on the rupee though India has a current account deficit. The central bank intervenes in the foreign exchange market to contain currency appreciation, leading to large foreign exchange reserve accumulation. Recently, the central bank has preferred modest currency appreciation to contain import inflation, given India's low dependence on exports and high dependence on imported oil.