Market sentiments have been buoyant—India gained ~8% in September—on back of positive developments on both domestic as well as global front. Slew of politically sensitive decisions undertaken by government send out favourable signals to investors and businesses and the central banks also in response has toned down its hawkishness. If this policy momentum continues, it can break the vicious cycle of the economy and pave the way for a cyclical uptick. Meanwhile, the forthcoming earnings season is likely to be tepid, with earnings and revenue growth slowing. However, pace of downgrades is slackening and breadth of earnings is improving.
Reforms : Breaking the vicious cycle
Over the past month, the central government shed its policy inertia and took a slew of politically sensitive decisions on several fronts. We believe these are meaningful steps which will send out positive signals to businesses, investors and RBI. If these steps are followed by further reforms, we are of the view that the economy could break out of the vicious cycle. Improving business sentiments, progress on fiscal consolidation, stability in external capital flows and RBI’s monetary easing could pave the way for cyclical uptick in the economy a couple of quarters down the line.
Monetary policy: Toning down hawkish guidance
In its September 2012 mid-quarter monetary policy review, RBI cut CRR 25bps while maintaining status quo on repo rate. More importantly, the central bank took a favourable view of the recent government actions and accordingly, toned down its hawkishness considerably. We expect RBI to cut policy rates by at least 50bps in remaning FY13.
BoP: Moves into a marginal surplus
Balance of payment (BoP) registered a surplus in Q1FY13, after languishing in negative territory in the previous two quarters. The improvement was primarily due to narrowing of current account deficit (~USD17bn versus ~USD22bn in previous quarter) as trade deficit (in goods) dipped. Further, uptick in capital flows also enabled BoP post a surplus. For FY13, we maintain our CAD estimate of ~USD65bn (~3.3% of GDP) and foresee substantial improvement in capital flows.
Markets: India outperforms its peers
Equity markets were buoyant during the month on back of government initiatives like fuel price hike etc., and aggressive monetary measures from ECB and Fed. Accordingly, net FII inflows improved, with Indian equities outperforming most peers as well as developed markets. Meanwhile, Q2FY13 earnings season is expected to be tepid with just ~4% YoY earnings growth for Sensex companies. Top line growth is also expected to moderate further. However, pace of earnings downgrade has slackened substantially and earnings breadth has started to improve.
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