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BlackRock Report: Outlook for India under New Management and Indian Markets


Sept 26, 2014: India has gone from a castaway market to investor darling – in the space of a year, driven by the good news surrounding the election of Prime Minster Narendra Modi and the appointment of Raghuram Rajan as head of the Reserve Bank of India (RBI). Following the full-blown optimism, what’s next? A new BlackRock Investment Institute (BII) publication lays out its views on policy, risks and markets.

Ewen Cameron Watt, BII’s Chief Investment Strategist, commented, “India’s GDP growth is accelerating, inflation is receding and investor confidence is increasing. However, while reform can be a game changer and Modi has a mandate for change, delivery is key. Markets need performance above promise. Another risk to watch is a re-run of the 2013 downturn in emerging markets in anticipation of a US rate rise.”

Naganath Sundaresan, DSP BlackRock’s President and Chief Investment Officer, said, “Overall, we do think equity markets have material upside in the next three years—albeit with bumps along the way. Fixed income is supported by a stabilized currency, a slimmer account deficit and likely rate cuts.”

Some highlights and investment recommendations are set out as follows, and are further elaborated in the report.

Ø  Modi and Rajan have set in motion an apparent virtuous cycle: increasing business confidence, accelerating economic growth, deficit reduction, receding inflation, a stable currency and inbound investment. Modi is acting as a hands-on CEO. He has revived stalled investment projects, further curbed government spending and initiated many small changes that make it easier to do business.

Ø  Under Rajan’s watch, inflation is coming down, real interest rates have turned positive and the currency has stabilized. India’s economy is now at an inflection point: We expect GDP growth to accelerate to 7% annually in fiscal 2015/2016 and beyond, driven by implementing half-finished projects.

Ø  Risks include a re-run of the 2013 bloodbath in emerging markets in anticipation (or fear) of a US rate rise. India is in better shape these days, yet the country is still dependent on external funding.

Ø  We also have yet to see progress on structural reforms and resolving policy ambiguities in the power sector. The next six months are crucial for investor confidence: Markets are anticipating a clear policy road map in the November-February parliamentary session and budget presentation, as well as rate cuts in 2015.

Ø  Equity valuations are reasonable, earnings momentum looks set to take off and domestic investors are buying. We therefore think the 30-stock BSE Sensex index has material upside in the next three years. Any corrections (a 5%-10% decline is a possibility) are likely to be short-lived, we believe. We like financials, consumer discretionary and small caps, but are lukewarm about staples.

Ø  Fixed income is supported by a stable rupee and slowing inflation. We expect India will add to its foreign reserves in the next year as the RBI keeps the rupee from appreciating. We see room for a rate cut in in the first half of 2015, as inflation edges toward the RBI’s target.

Ø  Rate cuts are likely capped at 0.5% as the RBI wants protection against another emerging market downturn, we believe. Currency swaps may start to price in the prospect of rate cuts of 0.25%-0.5% before year end – ahead of any actual rate reductions. A stabilized currency and used-up foreign investor quota on government bonds support local currency corporate bonds, but liquidity is in short supply here.