Policy Reforms Can Help Make India Attractive For Foreign Investors: Ridham Desai, Morgan Stanley

追加: 2026-06-03

[00:00:00]today. But let's go across now to Prashant who's going to be in conversation with Rhythm Desai, Chief Equity Strategist India at Morgan Stanley. Prashant, it's over to you.

[00:00:11]>> Well, coming to you from the Morgan Stanley Investor Forum 2026 and as always, we're sitting down with the man uh who got the pulse and who sort of you know put helps puts this conference together for so many years now. Rhythm Desai is with me. Rhythm, great to have you with us here. Thank you very much for joining.

[00:00:27]>> Thank you for hosting me. And it's a day when we've got some showers, some rains in Mumbai. So hopefully uh you know it rains good news as well. Uh but uh just just this just start with the starting point uh rhythm. Uh you know it's not very demanding. It's not as if this is a raging bull market. I'm just starting with uh sentiment is quite negative.

[00:00:47]There's a fair bit of self-loathing I feel now which is kind of you know we don't have AI, we don't have this, we don't have that and all kinds of things right. uh so it's almost uh very tough to justify a kind of bullish view. So that is where sentiment is at uh so just talk us through the conference and what you aim to get to your investors from the conference the message uh straight up.

[00:01:09]>> So see the interest level in India is very low that's the bottom line and the reason is that uh on a relative basis India is not looking good uh on growth.

[00:01:19]It's looking very good on valuations but it's looking very inferior on growth. So if you compare with other large markets and this is you know AI is uh is an excuse. The real deal is on growth. Uh and this has not been the situation only for the last 2 or 3 months. It's been the situation since September of 2024 when India's growth peaked, valuations peaked and since then the market has derated on a relative basis and uh and growth has been decelerating. Now growth did pick up uh in the December quarter.

[00:01:54]>> It's actually picked up a fair bit in the March quarter. Companies are quite positive and they're guiding despite the global uncertainty, despite the conflict in the Middle East. But the growth elsewhere is very strong.

[00:02:10]>> So the earnings growth in Korea, Taiwan, Japan, the US, even parts of Europe are way above India's growth. And this is not like a 2 3% point thing. So if India is doing 12 13 14% earnings growth, these markets are experiencing 30 40 50 and Korea is you know in the hundreds.

[00:02:28]>> Yeah.

[00:02:29]>> So that's where the the thing stands.

[00:02:32]This thing with respect to foreign investors only flips >> when the growth flips or the growth expectations flip. It's not when the growth flips because that'll be too late but when the expectations flip.

[00:02:44]>> So something has to give say in the memory cycle >> for Korea's growth to go down. Something has to give in the compute cycle for Taiwan's growth to decelerate and so on.

[00:02:54]>> So uh that's not something that's visible. In fact, uh the uh the capex in the world has been very resilient >> and it has not reacted to the uncertainty coming from uh from the conflict which is why markets elsewhere outside India are all putting up new highs and just not just not a a soft new high really strong highs. I mean Korea is up 60% from its March end low.

[00:03:23]>> Yeah.

[00:03:24]>> No, it's up it's up 60% this year. It was up 75%. No, it's up 100% YTD and it was up 75% last year and of course Taiwan has done what it has. Uh rhythm the the question is so so are you saying that for fi especially fi flows to flip that flip how you put it right this this memory trade in North Asia or I mean this entire AI capex frenzy has got to end because those are beneficiaries that's where that money is going so that needs to slow down a little bit for investors foreign investors to pay attention to India >> it's about expectations the expectations have to pivot >> the expectations that this is going to generate more and more growth has to change and India's growth expectations have to accelerate. So both >> both have to happen >> both are one I mean the relative growth picture has to change with respect to forward expectations.

[00:04:14]>> Is there any signs of the former happening?

[00:04:16]>> No >> because I mean if you look at Mongani estimates we're only upping our capex forecast for AI >> and a lot of this has to do with the AI supply chain. So there's no visible sign that this is about to slow down.

[00:04:31]uh that's not in the in the horizon.

[00:04:33]>> If anything, I have seen numbers which say that it's it's going to accelerate all the way into 2028, maybe even beyond. I mean, and and you're kind of sort of agreeing with that, right?

[00:04:42]That's your expectation. Estimates 28 is far away, but it's there for 27 at least.

[00:04:48]>> So, if you're looking at from a from a near-term perspective, next 12 to 18 months, this capex cycle is pretty intact >> and it is not seemingly going away.

[00:04:57]>> It's not going away. So, where does that leave us? So, so India's growth is accelerating and at some point in time the valuations relative to growth opportunities do become attractive >> and of course see there is a technical aspect to this. Uh retail investors in India are just not stopping the bid.

[00:05:15]>> So in March you would have ordinarily expected retail investors to be a little bit >> hesitant >> because the markets were volatile there was bad news. There was a draw down but they put record inflows and they followed up with another strong April and I think the May month also has been probably very strong going back by the amount of buying that domestic funds have done.

[00:05:36]>> So if that bid is on >> then there has to be a seller. Now there can potentially be two sellers.

[00:05:42]>> There can be corporate issuances and there can be foreigners. So the other way that foreigners can become buyers is that corporate issuances resume. It's counterintuitive, but that'll be good for the >> more supply basically.

[00:05:54]>> Yeah, exactly. That'll be good for the overall bid on the market. It'll be good for the BOP. It will be good. So, it's counterintuitive, but issuances can make a difference. Yeah.

[00:06:03]>> That foreigners can come back and participate in those issuances.

[00:06:06]>> Yeah. Because then they get space to to come into the market. Otherwise, retail has just kind of uh taken them out.

[00:06:13]>> That bid has been absolutely uh strong.

[00:06:15]And I don't expect the retail bit to go away because that's a secular shift that's underway in India.

[00:06:20]>> You pointed it out talking about for 11 years now and now finally that skeptism is fading but you know people are waiting uh that you know one day retail will panic but retail has matured in this and and they are upping their equity allocation rightfully so in my view in the long run this is going to pay off quite well to them.

[00:06:39]>> You know you started by saying that sentiment there is very low foreign interest in India at this point in time.

[00:06:44]time I mean you've done this conference what 20 plus years 28 years >> 28 years and if we were to sort of plot a interest level foreign investor level through those 20 conference where are we now are we pretty much at the low lows >> no no we have been through these like 2011 12 I remember was very bad >> but you know frankly I should have been ready with this data I am not uh we should see the data >> but you know I when we doing this conference in the early 2000s >> like in 2003 We used to write a a conference book. Now we don't do it.

[00:07:17]>> So I used to write the preface.

[00:07:19]>> You know India's market cap in 2003 was $100 billion.

[00:07:22]>> Wow.

[00:07:22]>> Because I remember writing this that 50% of India's market cap is going to be represented at our summit.

[00:07:30]>> $50 billion >> was was here.

[00:07:32]>> Yeah. So we have come really long way.

[00:07:34]Hundred billion. So it's difficult to make comparisons >> on the basis of numbers >> because the market is now up 45x. It's a much diff it's sized up >> it's a player in the global uh I started in 2003 as well so it was it's it's a year which I remember but rhythm u uh so just to complete the foreigner point right this constant selling that we are what we're seeing uh I was speaking to somebody and I was kind of surprised to hear it that you know typically uh and and this was a this was a in response to what I asked he said well you know typically we get asked uh whether foreigners are calling up and asking what should we buy but he I mean the gentleman again a foreign firm said well you know I'm getting questions of what can we sell to I mean to increase allocation to these other markets that rhythm that you were talking about as well is that something you pick up as well because that foreign selling is showing up on the screen every day >> foreigners are also selling Korea okay so let's not >> no it's almost but there it's more technical the selling >> yeah but this is also technical large part of the outflows are passive it's because the weight is falling because India's underperforming and every single day India underperforms the weight falls and and passives have to adjust their index uh in their position to match the index weight.

[00:08:45]>> So the flow bit it's not active discretionary kind of reallocation that kind of thing or that has already happened.

[00:08:50]>> There is that also >> uh and uh but there's a fair bit of passive in this. So it has got a circularity to it. The opposite of this was happening in 2024 which is why India's valuations got stretched and now it's going the other way and that's why it's getting depressed and and these uh uh the the passive thing has you know gain share globally in total assets under management and is a dominant uh uh dominant price mover and is not actually going to react to valuations is not going to react to relative growth opportunity. It's in the active bit but the active bit has lost share. So, so that is I think uh part of the problem.

[00:09:31]Just going back to the FBI question of course relative growth needs to get fixed >> and or we can have corporate issuances but I think we can also do adjustments on the policy front. I was coming to that that was >> so for example I think make it easier for foreigners to participate >> uh and that is I think something that you know should be done over the next few months because it takes a lot of time for people to get registered you know if I want to trade uh a US stock I just have to go to one of the brokers website register myself and I'm up for trading in 5 minutes >> that ease of trading that market And that got u I remember at the same TV8 uh forum the seb chairman was there and I think you and others made that point uh to him that the time to registration the time when you come in put the application in and when you were able to participate that was very very long and we got that feedback as well but that is still an issue that is still a niggle >> so for example in the budget we increased the limit for uh non-residents which includes non-Indians >> uh to buy up to 24%.

[00:10:42]But they still have to go through a process which makes it rather hard for them to uh to actually participate uh easily. It's not like a decision I make today I want to buy Indian stocks and I'm up and ready for trading this morning.

[00:10:58]>> I can't take a decision at 8:00 in the morning to trade at 9:15. If I'm sitting outside India without an approval >> and that I think can change uh and it can become a lot easier. I know there are concerns around uh roundtpping etc. But I think there is room for us to make it easier >> on the debt side. There's room for us to reconsider withholding tax >> because debt investors don't do it. We >> discussed Yeah. And debt investors surprisingly have have stood >> they have not they've not exited.

[00:11:29]They've actually been buying and this this is despite the losses they are suffering on the currency.

[00:11:34]>> What about taxation? Equities taxation.

[00:11:36]So taxation I don't think is is a is a burning issue in my view. Uh the issue about taxation is the whole administrative process to file returns and to pay the tax. It's >> not about the tax itself.

[00:11:51]>> And you know it reminds me of what my father told me in the 80s when I was first filing my tax returns for the first time. I was still a teenager filing my tax returns and I was complaining to him you know dad okay I have to now pay tax. So he said beta you made money now so that is why you're paying tax. So never be unhappy about paying tax. The fact is that you know a lot of foreigners who probably are are not making money now >> and and selling and so they're not paying the tax right. So I think tax is not such a burning issue. The administrative process around that could be >> yeah but I think easier access is probably the uh the better thing. If you want to for choose amongst policies then I think that's the easier thing to fix.

[00:12:36]Also capital gains tax it can be a can be a tricky thing.

[00:12:41]>> You can't do it retrospectively. Right.

[00:12:43]>> Correct.

[00:12:43]>> Correct.

[00:12:44]>> Because if you do it suppose hypothetically you reduce long-term capital gains tax to zero.

[00:12:49]>> It's going to be a selling avalanche >> because now I can take all my gains without paying tax. Who knows >> for the stock of investments that you have.

[00:12:57]>> Exactly. Who knows where the tax will be in 3 four years. So it can't be done retrospectively. It can only be done prospectively if at all.

[00:13:04]>> Yeah.

[00:13:06]>> Okay. Interesting chat there and we'll keep coming back to you with more from Morgan Stanley