India's market outlook for this year will be dependent on consumption demands, corporate earnings and inflation trends, says rating agency Moody's.
While maintaining that it expects the country to be the world's fastest growing major economy this year, the rating agency believes that the "market trends will depend on whether inflation remains under control and corporate profits revive."
Quoting a projection of a boost in consumption following the pay revision for Central government employees and pensioners, and a potential upturn in farm which is expected to boost rural demand, it added that a broad-based pick up in investment will only unfold with a lag.
"India enters 2016 on the cusp of a cyclical growth recovery, with inflation under control and the economy benefiting from lower commodity prices," Atsi Sheth, an associate managing director at Moody's said in a note.
While noting that these trends place the country at an advantage relative to many similarly rated emerging market peers, Sheth said "we believe that these advantages will only yield sustainable growth acceleration once corporate and bank balance sheets are repaired, and if the private sector remains internationally competitive."
While the Modi government has been facing hurdles in implementing big-ticket policy changes such as the goods and services tax, it has initiated a wide range of measures over the last year to spur investment in infrastructure, and also allowing greater foreign direct investment in many more new areas, apart from implementing an inflation targeting. It has also done commendably in addressing the troubles in the banking.
Sheth said inflation and corporate profit trends will offer clues as to whether these efforts have created conditions for growth that are sustainable over the next three-four years.
On the new inflation targeting framework, she said low inflation may indicate a greater balance between domestic demand and supply conditions, and would help private sector remain globally competitive.
