Mumbai got a big lift last week that is being attributed to rate cut hopes. Central bank policy is in the picture, but it is not the full story.
What is actually going on is that the Reserve Bank of India is getting very nervous about the rupee, which lost 16% of its value in 2011.
A weaker rupee may help India’s exporters, but it also cripples the buying power of local families already reeling from soaring food and fuel prices.
As a result, the RBI is relaxing restrictions on foreign investment in order to lure money into rupee-denominated assets and shore up the currency.
At the moment, you need to be an Indian citizen or register as an institutional account in order to get access to the Mumbai market.
Starting January 15, any investor who can pass a money laundering check will be able to open an Indian brokerage account and invest directly in local stocks.
This opens up an entire universe of world-class companies — from Standard Bank of India to giant conglomerate Reliance Industries — that previously were only available via diluted ETF exposure.
This also allows massive strategic investment in India. Foreign investors will be able to jointly hold 10% of any Indian company, with any single investor earning the right to grab up to a 5% position.
People have underestimated this because the news went quietly, but it is a big deal.
Remember, rate cuts may make capital easier to come by for Indian companies, but they also depress the value of the rupee — not good for banks or consumers.
India funds like EPI (quote) could get more than a one-day lift out of this. And if traders are disappointed the next time a rate cut does not materialize, it may be a buying opportunity anyway.