Here’s Why the Indian Economy is Soaring

The economy of India looked pretty dire last fall. But with a new banking chief making radical reforms and two of the country’s biggest lenders courting an influx of foreign investment, the country’s financial sector is looking more and more robust and poised for growth.

The improvement of India's financial situation can be attributed to a few factors, with a couple key players and strong performances from two major companies spurring growth and contributing to an overall optimistic international outlook on the Indian economy.

Indian Banks Grow After Investing Abroad

Two of India’s largest banks, ICICI Bank (IBN) and HDFC Bank (HDB) both saw substantial gains in Monday trading action, rising 4.41 percent and 4.64 percent by 1:30 EST, respectively. Those specific rises can be attributed to positive macroeconomic data released that day. International assets for banks located in India grew 23.4 percent, as opposed to a decline of 1.4 percent the year prior.  

The country’s once rampant inflation has been curbed, and the international investment community has become cautiously optimistic on India’s chances for economic turnaround. Last fall the country installed reformist Raghuram Rajan as Reserve Bank of India Chief, who proposed sweeping changes to stop inflation while doubling the borrowing limits of banks and ease norms for non-resident bonds to inject outside capital into the economy.

Changes Started with Rajan and Modi

A globally respected economist, Rajan’s drastic plans to greatly curb monetary speculation and significantly loosen bank branch opening requirements were given the benefit of the doubt, with Rajan insisting that “as India develops, not changing is even riskier.”

Since September, when Rajan first made these proclamations, those risky plans for turning around the world’s largest emerging economy appear to have been successful, with inflation dropping and GDP rising.

International investors’ have been further comforted by the recent election of Narendra Modi in a landslide election, an event viewed very positively by Indian analysts like KV Kamath of ICICI. Modi is considered as an ally of Rajan, and is expected to not meddle in Rajan’s aggressive plans to continue attracting foreign capital, divesting India’s holdings outside the country, and strengthening the rupee.

India’s GDP grew 4.7 percent in 2013, and improvement over the 4.5 percent mark the year prior. That marked the lowest growth rate in nearly a decade for India.

Broader Indian Markets Gaining

All the renewed faith in the Indian economy caused an uptick in several popular exchange-traded funds that track the broader Indian market. The highest by volume, WisdomTree India Earnings (EPI) rose 3.12 percent. The growth play-specific EGShares India Small Cap (SCIN) rose 4.79 percent. The biggest winner on the day in not just Indian finance plays, but the entire ETF market, was the leveraged Direxion Daily India Bull 3X Shares (INDL) , which gained 7.89 percent on the day.

This all stands in stark contrast to the fall of 2013, a period that saw India in economic crisis. The country’s currency lost a third of its value and financiers struggled with attracting foreign business amidst accusations that the Indian corporate law infrastructure was outdated and ultimately contributed to an environment that was too unstable to trust.

Indian Financial Sector’s Western Investors Reaping Benefits

Returning to ICICI and HDFC, analysts within India had been touting the two plays since last month, and it appears Stateside investors are now taking notice. Analysts had singled out the two bank plays back in January based on HDFC’s strong fundamentals and ICICI’s aggressive expansion into the vast “underbanked” areas of India via mobile branches-on-wheels.

Following the strong economic data coupled with optimism concerning Prime Minister Modi’s expected economic policy, HDFC can now claim a 30.75 percent stock rise on the year. ICICI has been slightly better, notching a 33.63 gain YTD.