The Hindu Business Line : Emerging positives for India

Over the past couple of months, we have been highlighting a list of nascent, but emerging, positives for the economy in the Indian context.. These While these still hold good, they may be overwhelmed in the near term by the prevailing environment, though they will eventually have a favourable impact on corporate India and investor perception.

— The reduction in inflationary pressures and tightening of liquidity has forced the Reserve Bank of India to embark on an unprecedented magnitude of cuts in a short time-span.

— The focus has also decisively shifted to growth with inflation now only a distant threat in terms of time.

— Rate cuts of October could neutralize partially the effects of rate hikes in April-May 2008.

— Further rate cuts from the RBI likely over the next nine-to-twelve months.

— Commodity prices have declined significantly, and, even if there is a rebound, they may settle at levels lower than what was experienced earlier this year.

— The close-to-70 per cent decline in oil prices, if sustained (and likely), could reduce the current account deficit in FY 2009 and more in FY 2010 and also improve the fiscal position in FY 2009 and especially 2010.

— The China slowdown and developed-world recession will ensure commodity prices are kept well under check over the next several months.

— Commencement and gradual scaling up of oil & gas production in India is likely to start making a difference from FY 2010.

— Infrastructure may get a renewed push; the more so once elections are out of the way.

— India’s vulnerability to slowdown in U.S, Europe and China is the least in the emerging markets’ space, as domestic consumption/investment are key drivers of growth.

— GDP growth in the vicinity of 6 per cent-7 per cent for a couple of years will not be a bad outcome in the prevailing global environment and after five years of 8.5 per cent-plus growth.

— Capacity shutdowns and slowdown in capacity addition plans may help bring about better alignment between supply and the emerging demand situation (Indian companies are not as extended as those in China and this should help)

— Valuation levels in selective pockets are becoming attractive from a long-term perspective, though earnings are at risk at the broad market level.

Sundaram BNP Paribas Mutual

Moderation in earnings growth

While the recent crisis proved to be cathartic for the global financial system over the long term, there is no clarity if the worst in over. Developing Asian economies appear less vulnerable given the relatively higher reliance on domestic consumption, however, the regions’ financial markets have been impacted by the rise in safe haven buying (read foreign investor outflows) and concerns around contagion effect. The recent events along with continued signs of weakening growth in developed economies has increased expectations of a ZIRP (zero interest rate policy) in advanced economies and further rate cuts in the emerging world. This could further help improve investor sentiment in the near term. The sharp fall in global crude oil prices and commodities ahs aided decline in headline inflation and enabled government to announce fuel price cuts, a positive for the Indian economy. Monetary policy focus has also shifted to liquidity management and economic growth.

The near-term direction of the markets, however, will continue to depend on FII flows, which might be impacted by recent developments and global uncertainty. Over time as RBI measures to reduce strain in particular segments of the economy take effect, and the rate cuts percolate down to end-consumers and corporate borrowers, we would see a fall in borrowing costs. Fiscal balances could come under pressure due to fall in revenues and further fiscal spending to boost growth. This may push up government borrowings and fresh supplies are likely to weigh on the on-going g-sec rally. Overall, monetary policy direction appears to be focused on boosting growth and ensuring credit availability.

Industrial activity has already been impacted and this along with the uncertainty about the future, will affect earnings growth over the coming quarters. While growth in consumption and investment are likely to moderate over the near term, we remain confident about the medium to long term growth prospects.

We believe well-managed companies with relatively better prospects will attract long term investors. Indian companies face headwinds in terms of tight liquidity and moderation in economic growth. But we continue to believe that Corporate India’s earnings growth will moderate to a sustainable 12-18 per cent (average) over the next 3-5 years. Despite the economic slowdown, India is expected to be amongst the fastest growing economies in the world.

Franklin Templeton India

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