Is India a 'bright spot' as Modi claims?

Some of Modi's biggest reforms have met with fierce political opposition, notes Una Galani.

Prime Minister Narendra Modi's pitch that India is a "bright spot" warrants some caution - especially when it comes to the equity market.

The return of larger initial public offerings is another sign of corporate India's revived optimism.

Foreign investors have piled into the country's stock market excited by reform rhetoric in the world's fastest-growing large economy.

But living up to expectations won't be easy.

Almost 18 months after Modi's landslide election, the IPO pipeline is filling up.

Coffee Day Enterprises, which operates 1,500 cafes, is raising up to $180 million in the country's biggest listing in almost three years.

Indigo Airlines owner InterGlobe Aviation is expected to raise more than twice that amount in the coming weeks.

The offerings are fairly significant by Indian standards. The 51 IPOs completed in the country so far this year raised a combined total of just $1 billion, according to Thomson One.

The country's equity market has held up better than most Asian bourses in the aftermath of China's mini-devaluation in August.

That's because India's consumption-driven economy is less exposed to China's supply chain, and because the oil-importing country benefits from lower energy prices.

With inflation in check the central bank can cut interest rates, encouraging domestic investors to buy equities.

Some of Modi's biggest reforms have met with fierce political opposition, however.

Polls show he faces a close fight in the upcoming election in Bihar, the country's third most populous state.

It is also hard to reconcile rosy economic forecasts with the lack of a convincing roadmap to repair the country's rickety state-controlled banks.

Credit growth is unlikely to exceed 10 percent, according to HSBC, which will hold back private investment. This matters because Indian stocks are no bargain.

Though the CNX Nifty is down almost a tenth from its March peak, stocks still trade at around 14.7 times estimated earnings for the next twelve months.

That's a chunky premium over markets like China and Japan. Even so, foreign investors are overweight: HSBC reckons mutual funds have almost four percentage points more of their funds invested in India's stock market than required by benchmark indices.

That leaves little room for disappointment.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)