Revathi Asset Management

The elephant in India

Indians are no strangers to depreciation in the INR. Many families are reminded of this problem when they prepare to send their kids abroad for higher education; they reminisce about the days when 8 INR bought you 1 USD. It’s closer to 85:1 now.

While this looks bad prima facie, it hasn’t been so when we look at the actual numbers for the past couple of decades. Over the last 21 years, the Rupee depreciated at a CAGR of just under 3.06%, from 45.55 on 01-01-2004 to 85.73 on 01-01-2025. This steady depreciation has continued recently as well.

The BJP, widely expected to win the 2024 elections, had set an aspirational narrative for 400 seats. They ended up securing only 293 seats after being forced to form a coalition government. Despite this, the INR depreciated only 2.3% in 2024. In fact, the INR has performed a lot better vs the USD than have a lot of other emerging market (EM) currencies this last calendar year.

India also hit the $5 Trillion mark on May 21, 2024, making it only the 4th country/region to join the exclusive $5 Tn market cap club, alongside the US, Greater China Area, and Japan. And yet India is seen as a risky emerging market and, as such, is afforded only a tiny allocation in the EM equity baskets and indices.

To envisage future potential, India is currently projected by the IMF to have one of the highest growth rates. Economic growth is highly stable and predictable with favourable demographics and a growing middle class. And this is nothing special for India; 15% CAGR in INR terms is exactly what the Nifty 50 has returned for the last 22 years.

EM exposure doesn’t actually give you India

To put this into the perspective of purchasing power, let’s compare the USD-adjusted returns of the Nifty 50 vs the MSCIEEM index. Using publicly available data, we see that the USD-adjusted Nifty mirrored the EEM index from 01-01-2003 to 01-01-2009. However, after that, it has picked up significant, sustained outperformance into 2025. In 22 years, the Nifty in $-terms has returned an 11.99% CAGR vs a 6.14% CAGR on the MSCI EEM. An investor invested in India vs the “emerging markets as a whole” has been rewarded for taking the concentration risk.

So we’re looking at highly predictable GDP growth in a stagnating world, where even other EM stock markets and economies are showing lacklustre results. To make matters worse for other emerging markets, their currencies are also depreciating faster than the INR is vs the USD. Thus, and although we may be biased, we believe that India deserves an allocation in every global, institutional portfolio.

So does that mean it’s time to blindly pile in? Not so fast, because we still need to compare India and EM stock market performance vs that of the US. This allows us to establish comparable statistics from a larger, macro viewpoint.

Institutional portfolio evaluation

Let’s now compare some equity portfolios from the perspective of US- or Europe-based institutional investors. We take the S&P500 as the control case to represent the equity allocation that would be a part of the larger asset portfolios of pension funds, insurance funds, fund-of-funds, and family offices. In other words, our benchmark for equity risk is the S&P500 itself; we assume that every potential equity investment is considered against this base choice.

We then test two portfolios, each taking a 10% slice moving from US equities: the first goes into the MSCI EEM and the second goes into the USD-adjusted Nifty 50. Given our study above, we are not surprised to find that a 90-10 US-Nifty has outperformed a 90-10 US-EM.

Now comparing the performance stats, we see that 90-10 Nifty has returned a similar 9.8% vs the 10.17% by the US only. The 90-10 EM portfolio return is much lower than the S&P500 at 9.35% CAGR. The max drawdowns are similar across the board. The risk and volatility statistics are marginally weaker for the Nifty portfolio vs the S&P500 but EM is much weaker further.

From the perspective of a large institutional investor who sees equity allocation in terms of a segregated risk bucket, the 90-10 Nifty portfolio is not massively different from the S&P500. If an institution already has a large EM exposure, then the India portfolio has been a better option for the last 20+ years. The added benefit of having India is that it gives the portfolio an emerging market diversifier without substantially subtracting from the overall performance. Also, going back to local Indian investors, this means that their purchasing power has been protected for the most part despite the currency depreciation.

But a Nifty 50 ETF isn’t good enough

While you may be sold on India, you shouldn’t be sold on the Nifty 50 just yet. The Nifty 50 is a market-capitalisation-weighted index. This means that there is annual churn at the tail end as some companies underperform and thereby become smaller, whereas some smaller companies outperform and get added to the Nifty 50. In theory and practice, this is a great way to manage risk; it automatically screens out under-performers and re-allocates to up-and-coming winners. However, because it is purely market-cap-based, the problem that there are no filters for fundamentals arises from a portfolio management perspective. As a result, idiosyncratic momentum-chasing in a particular stock can drive its market cap into the Nifty 50, without any care for its valuation. Then, when you buy the Nifty 50 ETF at the latest prices, some percentage of your portfolio is a fresh buy of this newly-added stock trading at 200 P/E, which likely will not be the best choice for a long-term portfolio.

Above is a graph of the Nifty 50 Total Returns Index (i.e. Nifty 50 adjusted for dividends) vs the Nifty Top 20 Equal Weight TRI (i.e. top 20 companies from the Nifty 50, equal-weighted). Even such a simple screening, which effectively almost always screens out the churn in the Nifty, contributes to measurable long-term outperformance.

This single algorithmic change alone adds 0.5% of CAGR over a 15-year timeframe and slightly improves the risk statistics of the portfolio. This difference may seem small when looking at it in absolute terms, but it will pay for half of the management fees for institutional investors.

However, the risks for the index investor don’t end there. Any foreign investor looking at an EM like India is also concerned about political risk. In this regard, the Nifty 50 has many state-run companies. It also has a host of quasi-state-run companies and commodity firms for a country that’s a net importer of commodities.

With the recent boom in Indian markets, these stocks have benefited disproportionately and are currently trading at exorbitant premiums compared to their own historical valuations. As a result, their market caps are inflated. Thus their weightage in your portfolio should you buy the Nifty 50 today will be much higher than the fundamentals would suggest is financially prudent. Thus, only with careful screening is it possible to participate wisely in the Indian growth story.

Thinking and investing in dollars

The past has shown that India is a great place to be for a long-term foreign portfolio investor. We are also seeing this currently as the macro indicators are performing as expected at historical levels. Indian 10-year govt bonds yield around 6.8% at the time of writing, CPI is at the historical 4.5% or so mark, and the Nifty 50 delivered a 10.6% return in INRterms. The INR depreciated 2.8% vs the USD. Nothing here is out of the ordinary.

In the future, these trends and stats are broadly expected to stay the same due to favourable demographics, a growing middle class, and a tech-savvy, services-oriented workforce. If investing in the large caps in India, valuations are reasonable and you do not have to chase the market at local highs.

From a foreign, institutional lens, it’s good to see that:

1. Rupee depreciation is standard but stable and known at 3% while govt bond yields and CPI are at/near historical averages.
2. The Nifty 50 has returned 12% CAGR in USD terms over the last 22 years.
3. A 90-10 US-Nifty portfolio performs very similar to a sole S&P500 allocation.
4. You can buy the large caps at reasonable prices in early 2025.
5. There is room to add further risk-adjusted performance through careful screening.