Mumbai: Indian equities, already among the top performers in Asia this year, may start drawing back foreigners after the government announced a $32 billion rescue for state-owned banks weighed down by bad loans.

“Foreign investors will view this very positively," said Sageraj Bariya vice-president of sales at East India Securities. The plan “should inspire confidence in trade, industry and investors."

Overseas funds so far in October have sold a net $1 billion of Indian stocks, cutting their 2017 inflows by 20%, following the slowest economic expansion in three years.

Growth concerns may ease as optimism builds that the recapitalisation plan will fill the gaping hole in capital that had curbed the banks’ ability to lend.

There are signs foreigners may be coming back: their purchases of local shares on Wednesday was the most in eight months.

Earnings at NSE Nifty 50 Index members have trailed consensus forecasts for most of this decade, data compiled by Bloomberg show, prompting some fund managers to warn that valuations are too high. Even so, the S&P BSE Sensex and the NSE Nifty 50 have set fresh records as local investors plowed money into shares, shrugging off concerns about how last year’s currency ban and a new tax regime were affecting corporate profits.

“This is a stimulus and the government has done its bit to kick start growth," said Sanjiv Bhasin, executive vice president at India Infoline Ltd. “The earnings growth recovery which was supposed to happen in 24 months now can get pushed forward by a year."

Overseas investors bought a net Rs6,800 crore ($1.1 billion) of shares on Wednesday, the biggest single-day inflow since February. India’s stock market has a total value of about $2.2 trillion, according to data compiled by Bloomberg.

‘Indian TARP’

Morgan Stanley dubbed the bank rescue the “Indian TARP," a reference to the US Troubled Asset Relief Program set up during the financial crisis. The program could help add as much as 5 percentage points to gross domestic product, according to Goldman Sachs Group Inc.

“A substantial improvement in the growth outlook is likely to be bullish equities," Goldman analysts led by Jonathan Sequeira wrote in a note Wednesday.

Still, the banks first need to clean up their balance sheets and then post an increase in lending, according to Jefferies India Pvt. Some were concerned about the rescue itself.

“On the one hand, the money is not going to be enough," Rajendra Wadher, director at PRB Securities, said referring to the government’s capital injection.

“On the other hand, how it it going to be paid?"

For now, investors seemed to welcome the plan. The NSE Nifty PSU Bank Index, a measure of state lenders, surged a record 30% on Wednesday.

State Bank of India’s 28% surge led gains on both the Sensex and the Nifty. Both indexes hit fresh records on Thursday.

The Sensex has climbed about 31% in dollar terms this year, and is vying with South Korea’s benchmark for the top spot among Asia’s major markets. Both measures are beating the MSCI AC Asia Pacific Index.

“Foreign investors will return to the market soon as Nifty and Sensex continue to scale new highs," said Jai Balasubramaniam, Singapore-based chief market technician at “Outperformance will get noticed and allocation will come to it." Bloomberg