High Hopes

On the cards are potential reforms in the pension and insurance sectors, liberalisation of Foreign Direct Investments and the greater role of the private sector in infrastructure development. In addition, we are likely to see greater traction in the government’s privatisation program. The revival in investment momentum may improve corporate confidence and cause capital flows to resume.  On balance, the combination of all these factors may boost the mid term outlook for GDP. However, concerns over India’s burgeoning fiscal deficit are unlikely to go away in the near term, although capital inflows may reduce the pressure on the Balance of Payments, as well as keep interest rates low. We would like the budget, which would be presented in the next 30-45 days, to include strategies to address the country’s deteriorating fiscal balance.

Sensex to Gain Further Ground

We expect the Sensex to gain further ground in the medium term on the back of positive investor sentiment. The financials, real estate, industrials, materials and energy sectors are likely to outperform at the expense of the more defensive sectors (e.g. consumer staples, utilities, telecoms and export oriented sectors). We have been positive on Indian financials. The recent earnings results of Indian banks have exceeded expectations on the back of treasury gains, lower than expected Non Performing Loan provisions and improved net interest margins.

*The above commentary was written as at 18 May 2009.