In the near term, we expect Indian equity markets to stay cautious and range- bound. Concerns on India’s high fiscal deficit, stubborn inflation and faltering growth persist amid political inaction at the Centre. While the delay in implementation of GAAR might bring back much-needed liquidity, we believe investor sentiment will stay subdued until India’s macro indicators and policy environment become more certain, the rupee stabilises and corporate confidence improves.
While we do not expect a slowdown in India’s long-term gross domestic product (GDP) growth trajectory, we believe policy uncertainties, conflicting demands of a popular democracy and India Inc’s rising despondency are increasing the risk of India’s medium-term GDP trajectory slowing towards the six per cent level from the average nine per cent over the past five years (ex-crisis period).
The markets are reeling under fear of a possible downgrade of India's sovereign debt rating if the expected reforms do not come through soon. Investors are also on a 'wait-and-watch' mode ahead of important policy meetings in Europe and the US in the next few days. What they badly need is the fuel of reforms, in short supply during the UPA regimes.
The fuel price hike buzz is back but it has been around for some time, with the government yet to take bold steps. PSU disinvestment remains in limbo, even as the Centre struggles to launch other reforms. The timing and quantum of the price hike will be seen not only as a key test of the government's ability to drive a political consensus but also its resolve on subsidy rationalisation, which has emerged as a core variable for fiscal finances.
The next one month will witness several events in Europe that would drive market direction. The ECB bond buying plan (unlimited, albeit with conditionalties) has to a large extent reduced downside risk.
A positive German constitutional court ruling on the European stability mechanism (ESM) would also support the markets. Markets would also keenly watch any statements on Spain’s bank recapitalisation request, as well as progress on the discussion with Greece on new austerity measures, which will be critical for the ^ 31.5 billion loan instalment.
Current market valuations are not expensive and further big earnings cuts appear unlikely. Further, concerned by fears of a sharp and protracted economic slowdown and the risk of a sovereign downgrade, we expect the government to make some progress on reforms. While it might be difficult for the government to push through any significant ones in the near term, we believe it will focus on simpler measures, such as resource allocation, infrastructure spend, small-ticket divestment and tweaks in fuel prices to ease the near-term pain.
We believe investor concerns in relation to lower domestic growth and a lack of project execution are now largely priced in. As such, we expect a combination of monetary and government policy action to bring some confidence back and to help capex growth momentum towards the second half of FY2013.
With the exception of a systemic crisis emanating from Europe or escalation of geopolitical issues in the Persian Gulf, we expect to see a gradual recovery in the domestic macro situation over the next few quarters.
The author is EVP & Head - Investments, ING Investment Management
