Recovery Is In Sight

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A lot of people have been speaking about the decoupling of Indian economy from that of the world but to me that is not a practical idea. In the long term, the world economies grow together. They are bound to have positive as well as negative impacts on each other. Although we are a 65 per cent consuming and 35 per cent exporting economy, even that 35 per cent provides employment to a lot of people and their performance has an impact on the domestic economy. As of now, as the US starts on its journey of recovery, so will India and that too at a faster rate.

Everyone in the market is happy that the Indian voters have given the government the mandate of economic development and reform. In these times of global turmoil, India was in a desperate need of a stable and capable leadership to combat the economic challenges and now this seems like a heavenly opportunity. Our view is that economic reforms will gain momentum under the present team of the government and these would be irreversible in the long run. The stock markets never like uncertainty and they would benefit now given that the darks clouds have vanished.

We also feel that is a good opportunity for the prime minister to usher in reforms. In the last tenure there have been a lot bills pending approval by the government. These reforms, especially the ones related to insurance, pension, banking, PSU divestments and the finance sector, have to be fast-tracked. Hopefully, the blueprint of the first 100 days of governance will reflect this. Also, the budget will present a clear direction in which the government actions will head towards. My personal feeling is that the markets are a forerunner to the economy and as the economic situation improves, the markets would carry the indicating signs. The markets would be 15 to 20 per cent higher by the end of this year.

As the economy recovers from a recession, there always will be periods of lull. If one sees the figures for the quarter ending March 2009, the toplines of the received results are down by 2 per cent whereas the profits are stable or more. The CII’s survey instates that the economy is  already showing nascent signs of recovery. The CII Business Confidence Index has improved 2.4 points for the first half, thereby reaching 58.7 points. Similarly, ABN Ambro Bank’s Purchasing Manager’s Index, based on a survey of around 500 companies, stood at 53.3 points, up in April by almost 4 points from 49.5 points for March. Any such index above 50 signals an extension. These positive indicators have therefore created a new coinage called ‘the green shoots’.

If we look at the WPI inflation at 0.61 per cent, it is well below the RBI’s comfort zone of 4.5 per cent and a medium-term target of 3 per cent. The caveat is that the previous estimates are being revised upwards and there is an upward move in the global prices of commodities. The appreciating rupee will help keep the inflation low and very much within the comfort zone of the RBI whom we expect to retain its soft stance at the least for the next half of the year. There may be bias towards loosening rates and we might witness further correction in lending and depository rates.

From the government’s stance and intent, it seems a lot of emphasis would be on the infrastructure sector. Similarly, the financial sector, reforms for which are pending in the parliament, will witness a strong participation in the current rally too.