Indian Market Still Attractive

The Indian Stock Market has gone up sharply in the recent weeks based on high expectations from the re-elected United Progressive Alliance government, (this time with a record mandate), which promised to bring about high economic growth by opening up foreign investment and boosting infrastructure spending.

The Bombay Sensex is now at around 15000, almost double from the bottom hit in November 2008. The rally has been broad-based, with shares of Indian ADRs of software companies like Infosys (INFY - Analyst Report) and Wipro (WIT - Analyst Report), banks like ICICI (IBN - Analyst Report) and HDFC (HDB - Analyst Report) and automobile companies like Tata Motors (TTM - Snapshot Report) up sharply.

Foreign institutional investors (FIIs) have invested more than $5 billion (over Rs 25,000 crore) in Indian stock markets so far this calendar year, with as much as $3.2 billion coming since the UPA government came to power last month, which is one of the main reasons for the rally. The FIIs have been pouring money in the Indian markets on the improved political situation and signs of recovery in the economic situation worldwide.

The focus has now shifted to the new government's budget, slated for early July, which will indicate to a great extent whether the current market optimism is justified or if the market is getting ahead of itself.

However, given the worsening fiscal situation (the level of central government debt at almost 60% of GDP, which is much higher than most emerging Asian economies), the Government's ability to pass a large stimulus package is rather limited.  

The Government also has to move fast on the reforms promised during the elections. Some of the areas that need urgent attention are infrastructure, social sector and financial sector reforms. Poor infrastructure is regarded as the major constraint in India's performance. Also, there needs to be positive movement on social sector reforms in view of high levels of poverty and illiteracy.

While worldwide there has been a rethinking on financial sector liberalization after the crisis -- especially related to liberalization of the capital account and an expansion of unregulated financial sector -- in India's case, there is a lot of room for opening the financial sector while continuing to carefully regulate it.

Among other reforms in the pipeline opening up to more foreign investment are retail, insurance and banking sectors, and reducing Government ownership in  refineries, banks and fertilizer companies.

Although the Reserve Bank of India in its annual monetary policy in April forecast a growth rate of around 6% for the current fiscal year, Prime Minister Manmohan Singh said recently that the growth rate would be at least 7%, and with efforts the country can revert to 8-9% economic growth in the medium term. The economic growth during 2008-09 dipped to 6.7% from 9% a year ago, due to the impact of the global financial meltdown.

A stable political situation, prospects for high economic growth and reforms make the Indian markets still attractive as the valuations are reasonable. Further, democracy, independent judicial systems and transparency make India preferable to some other emerging economies. Moreover, Indian domestic consumption has been increasing sharply in recent years.

We anticipate the markets to continue on the positive note. There may be occasional profit-taking given the sharp rise in the recent weeks, however, so
investors should buy on dips.