Strong credit growth, $2.45B July inflows aid Indian markets: Jefferies

Auto sales and property transactions point to healthy consumption and investment, Jefferies said. That domestic demand is helping offset the impact of volatile foreign flows.

The rupee has strengthened as foreign currency inflows picked up. Jefferies pointed to two catalysts. The Reserve Bank of India's scheme for non-resident Indian deposits has drawn about $41 billion so far, with the report projecting $80 billion to $100 billion before the program ends in September. Separately, interest income on Indian government bonds was made tax-free starting June, attracting $8.7 billion in foreign investment since then.

The rupee was at 95.17 per dollar at the time of the report, recovering from a low of 96.96 in May. The RBI kept its policy rate unchanged for a fourth straight meeting and maintained a neutral stance. Jefferies India strategist Mahesh Nandurkar expects only one 25-basis-point rate increase in the current cycle, the report said.

The report cautioned that the year-to-date foreign selling still poses a risk. The combination of record credit growth and resilient domestic demand, along with improving capital inflows, creates a more supportive environment for Indian equities, Jefferies said.