Mumbai: Mark Mobius is leading a return of fund managers to India as the nation’s biggest banks say demand for cars and homes will help them ride out a global recession.

Leading the pack: A file photo of Templeton Asset Management’s Mark Mobius (centre), who manages nearly $24 bn in emerging market assets. The investment guru says he is buying Indian consumer-related stocks. Santosh Verma / Bloomberg

Bulls on India were clobbered this year as the rupee fell 21% to a record and the Bombay Stock Exchange’s benchmark index, the Sensex, slumped 57%.

Executives at Mumbai-based State Bank of India (SBI), the nation’s biggest lender, and Housing Development Finance Corp. Ltd (HDFC), the largest mortgage firm, said investors ignore the potential for interest rate cuts and rural spending to fuel demand.

Finance minister P. Chidambaram had predicted last week that economic growth will “bounce back" to 9% next year, from at least 7% this year, driven by record crop plantings, public sector pay increases and tax breaks. The International Monetary Fund in Washington said this month that India may expand 6.3% in 2009, the fastest after China among the world’s 20 biggest economies.

Sustained expansion in the world’s second most populous nation would help lift 456 million people out of poverty and underpin the shrinking economies of Japan, Europe and the US.

Domestic consumption accounts for more than 55% of India’s economy, compared with 37% of gross domestic product in China. Chidambaram, 63, had said in an 18 November interview that the central bank has scope to cut borrowing costs as inflation slows to a level “we can live with".

India is adding 100km of new roads under a $27 billion construction programme, bringing urban markets within the reach of 60 million farmers in the past five years. Even Detroit-based General Motors Corp., seeking a US government bailout, is hiring 500 workers as Indian car sales, which fell the most in three years last month, “should improve", said P. Balendran, a vice-president at the local unit.

“My rural business is growing faster than my urban business," SBI chairman O.P. Bhatt, 57, had said in an 18 November interview. “The psychology and the expectation of the people have changed. They are looking for a better life, they are actually enjoying a better life."

SBI plans to hire 25,000 staff and open 2,000 branches in the year ahead, Bhatt said. HDFC predicts lending will increase more than 20%, managing director Keki Mistry had said in a 19 November interview.

Templeton, Aberdeen Asset Management Plc. and F&C Asset Management Plc. are buying Indian stocks as strategists predict a rebound in the rupee, after it fell 8% since 15 September to 50.04 per dollar. That’s when the bankruptcy of New York-based Lehman Brothers Holdings Inc. caused credit markets to freeze, prompting investors to hoard cash and pare investments in everything, but the safest government securities.

The median forecast of 17 strategists in a Bloomberg survey is for the currency to strengthen to 48.30 by the end of June. “We are positive on India," said Devan Kaloo, who overseas $30 billion as head of global emerging markets in London at Aberdeen, Scotland’s biggest independent money manager. “The key drivers for growth are domestic, with the prospect of rates coming down sharply into 2009."

Kaloo and Mobius are buying after many global funds gave up on the market. Overseas investors turned net sellers of Indian equities this year, dumping a record $13.4 billion, according to data provided by market regulator Securities and Exchange Board of India. They had bought a record $17.4 billion in 2007.

“I am not a huge believer in the Indian story," said London-based Steen Jakobsen, who manages $150 million as chief investment officer at Saxo Bank, a Danish Internet trading bank. “It has a huge infrastructure problem."

Steel Authority of India Ltd of New Delhi, the nation’s second biggest producer, said this month it may lower output as construction companies delay projects. Bangalore-based Infosys Technologies Ltd, India’s second biggest software services provider, cut its profit forecast in October. Mumbai-based ICICI Bank Ltd, India’s second largest bank, suffered a run on deposits last month as its funding costs surged.

India’s inter-bank overnight lending rate soared to a 19- month high of 19.5% on 31 October even as the central bank cut its benchmark rate by 1.5 percentage points in two weeks to 7.5%. The rate has since dropped to 6.55% as the central bank pumped cash into the financial system.

Slowing global growth may benefit India by giving the Reserve Bank of India “scope" to cut rates after crude oil prices tumbled 60% in four months, Mobius said. India is a “very large market" that isn’t highly linked to the global economy, he said.

Inflation, which cooled to 8.9% from a 16-year high of 12.91% in August, will slow to 5% in June, HDFC’s Mistry predicts. Fair value for the rupee would be between 40 and 44 per dollar within 12 months as India’s trade deficit narrows, he said.

“Inflation is behind us," said Mistry, 53. “Over one-three years, I am extremely bullish on Indian stocks."

SBI’s Bhatt predicts the currency will appreciate to 45 next year because 80% of foreign funds have already left the stock market. India has a “huge pent-up demand" should housing prices and mortgage rates fall, because 90% of households can’t afford to buy a home, he said.

A drop in the country’s home loan rates to below 10%, from as high as 14%, will “kick-start consumer buying", ICICI chief executive officer K.V. Kamath, 61, had said in a 17 November interview. The cost to protect bonds of ICICI from default fell to 875 basis points from a record 1,794 reached on 27 October, according to CMA DataVision prices. A basis point, or 0.01 percentage point, on a credit default swap (CDS) contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

CDS, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities, or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.

“India will survive the crisis," said Sergey Dergachev, an emerging market money manager at Union Investment Privatfonds GmbH in Frankfurt, which has $233 billion in assets. “Growth will weaken, but India will be in much better shape than many other much more open economies."

He bought rupee forwards, or contracts that allow for the purchase of the currency at current prices for delivery at a specified time and date.

Indian banks have about $1 billion of foreign currency securities tied to failed or stressed institutions, including bankrupt Lehman, out of total debt assets of $510 billion, according to central bank estimates. That contrasts with almost $1 trillion in write-downs by financial institutionsworldwide.

ICICI’s capital stands at about 14% of assets, compared with the 8% recommended by the Bank for International Settlements in Basel, Switzerland.

“The Indian financial system got cleared up five years back and thereafter has not ventured into anything, which should cause worry," Kamath said. SBI and HDFC are in “pretty good shape" to expand lending, said Jeffrey Chowdhry, who manages $2 billion as head of emerging-market equities in London at F&C. After slumping 74% this year, ICICI trades at 0.8 times its book value, compared with 1.1 times for Bank of China (Hong Kong) Ltd, the nation’s fourth biggest lender.

“We are like kids in a candy shop," Chowdhry said. “We can see lots of companies that we want to be buying at this level on a two-three year view, because we know we’ll make a lot of money." BLOOMBERG

Wes Goodman and Ron Harui in Singapore, Oliver Biggadike in Tokyo, Paul Gordon, Anand Menon and Cherian Thomas in New Delhi, Vipin Nair, Sumit Sharma and Pooja Thakur in Mumbai and Monica Bertran in New York contributed to this story.