As the Modi government completes first year in office, though almost all American investors are "overweight" on the country, they also complain that nothing is changing on the ground, says a report by Bank of America -Merrill Lynch.
The US-based brokerage expects Reserve Bank Governor Raghuram Rajan to cut policy rates by another 0.25 per cent on June 2 and said that rate cuts and not big-ticket reforms will have tangible impact on growth.
In the report titled 'Investorspeak: From hope trade to show-me trade', BofA-ML India economist Indranil Sen Gupta said, "We met equity investors in New York and Boston last week. While almost all are overweight on Indian equities, there are indubitable concerns that nothing is really changing on the ground."
On the rate cut, Gupta said, "I expect Rajan to cut (rates by) 25 bps on June 2, pause to allow markets price in the Fed rate hike expected in September, and then cut 50 bps more in early 2016."
Stating that rate cuts rather than reforms are key to cyclical recovery, the brokerage retained banks, other rate sensitives and pharma stocks as its favourite picks for the year.
"There is greater acceptance of our standing view that the turn in the growth cycle will depend far more on the global economic cycle and lending rate cuts at home rather than reforms," he said, advising investors to focus on reserve money and by extension lending rate cuts, to track the green-shoots.
Stating that US Fed hike, earnings and Bihar polls will be the biggest swing factors for the market going forward, Gupta underlined that only RBI can help swing the economy with more rate cuts, and that reforms have not much role to play, negating the argument that investors dumped domestic stocks and debt in the past weeks due to losing steam on the reform front.
