Despite a sharp correction in the bond, currency and equity markets, the worst may not be over yet if the government continues with its “business-as-usual” mindset, says a strategy report by Kotak Institutional Equities.
“We would like to see more effective steps from the government to address India’s balance of payment and fiscal challenges before we take a more favourable view on the stock market,” say Kotak analysts Sanjeev Prasad, Akhilesh Tilotia and Sunita Baldawa in the report.
The brokerage calls for more effective measures both in the short term and long term to address India’s basic problems of twin deficits and weak investment cycle.
“We believe that the recent measures implemented by the RBI and the government tackle the symptoms rather than the underlying problems of current account deficit, gross fiscal deficit and weak investment. Not surprisingly, they have proved inefficacious,” the report says.
Kotak Institutional Equities is of the view that the effective measures by the government can result in large capital inflows, as equity investors and NRIs may take advantage of a weak currency, and also, higher exports in the medium term.
“It is up to India’s policymakers to implement measures that can restore the sagging faith of investors in India’s potential,” say the Kotak analysts.
The analysts believe that most of the macro-related risks are getting priced after a sharp fall in the market over the past few months. However, most ‘cheap’ stocks could languish at low valuations without an improvement in the macroeconomic situation, while ‘good’ stocks still continue to trade at rich valuations, they add.
