Foreign investors bet big on revival in buying power of domestic consumers

The domestic consumer economy of India seems to be on full throttle on the road to recovery as the world wriggles out of the pandemic blues. With the government lifting all restrictions it had slapped to keep the spread of the disease, the domestic consumer have come up in a big way.

High-frequency indicators such as automobile sales, air and rail passenger traffic and anecdotal evidence from various consumer-facing sectors show that more and more consumers are willing to spend, especially, in urban areas.

“From a cyclical perspective, the full reopening of its economy, which took place earlier this year, is enabling the recovery. Mobility has remained above the pre-Covid levels, supporting domestic demand,” brokerage firm Morgan Stanley said in a note.

Foreign investors, too, believe that the consumption economy, which accounts for nearly 60 percent of India’s annual GDP, is set to emerge with high growth. In August, as foreign investors pumped in a record $6.1 billion in Indian stocks, their favoured destination was consumer-facing sectors.

Foreign investors had net bought stocks worth nearly Rs 15,000 crore in August in automobiles, consumer durables, consumer services and fast-moving consumer goods. Consumer-facing sectors accounted for nearly 29 percent of the total investments made by FPIs in August.

Consumer services sector saw the highest buying from foreign investors as it attracted inflows of Rs 5,500 crore in August largely driven by the optimism for hotel companies, who are enjoying their best purple patch in years.

Automobile companies got the second highest allocation among consumer-facing sectors of Rs 3,736 crore on optimism that the sector’s four-year slump is over and a new cyclical upturn has begun.

“We are at the beginning of the automobile cycle and if it lasts 3-4 years, then clearly there is a lot of upside left,” Anshul Saigal, portfolio manager and head of portfolio management services at Kotak Mahindra Asset Management Company.

Rural Factor

In the beginning of the year, investors were concerned over the prospects of the rural economy, a key driver of domestic demand, given that high inflation and unseasonal rains had eaten into the rural consumer’s spending power.

The pain was easily visible in the volume performance of FMCG companies that were concerned about downtrading among rural consumers, pinched by rising prices.

However, a normal monsoon and the recent improvement in crop sowing patterns have made Indian Inc and investors optimistic that the rural demand will recover in time for the crucial festival period.

“While monsoon rains are mean reverting to normal levels, an increase in sowing activity has improved the outlook for agriculture production,” Rahul Bajoria, managing director and chief India economist at Barclays, said.

Further, the Reserve Bank of India has argued that retail inflation in the country likely to have peaked in the June quarter with the Consumer Price Index showing signs of softening in the past two months.

The central bank’s interest rate hikes as well as the government’s interventions are expected to bring inflation further down in the coming months, although a return to sub-5 percent inflation rate may remain elusive for the time being, according to experts.

Saigal said that conversations with several consumer-facing companies have indicated that revival in domestic consumption is likely to be strong going ahead as the rural economy makes a comeback post monsoons.

“This (consumption) is a space that looks very interesting for the next three to five years,” Saigal said.

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