Edelweiss Capital, in its latest India strategy report, has said that strong growth in the industrial sector coupled with good monsoon and easing of inflation concerns are likely to sustain the current economic momentum.
"Fear of overheating of the economy is abating. Over the past 2-3 months, growth has been consolidating at sustainable levels. RBI also indicated that the economy is fast approaching potential growth rate," says the report.
"We feel that RBI has embarked on a wait-and-watch approach... If inflation continues its downward trajectory, RBI may have to hit a pause button for now," it adds.
The report, however, also spells out a few concern areas, including high trade deficit and an impact of any unfavourable global event. "Weakening external demand, relatively strong domestic demand and sharp appreciation in INR on REER basis since April 2009 could keep trade deficit on the higher side. GoI has recently extended benefits to some of the labour intensive export sectors," explains the report.
"The flows have been healthy so far, but in case of any unfavourable global event, risk aversion could rise, triggering high volatility in capital flows to EMs including India," it goes on to add.
While there is an overhang of large paper issuances, the domestic brokerage is of the view that foreign flows are expected to remain supportive. India has been one of the most favoured destinations amongst EMs, clocking more than $20 billion of net inflows in the current calendar year. South Korea is a distant second with about $10 billion of net inflows, notes the report.
Among sectors, Edelweiss is bullish on autos, media, airlines, real estate and banking. It also prefers players in industries such as material handling, earth moving equipment for mining and transmission towers for power evacuation.
