THE Indian market was least affected by the US Fed’s tapering announcement of another US$10 billion in February, mainly due to its improving macro fundamentals including the twin deficits, stabilising rupee and the falling rate of inflation. The Sensex is currently trading near its all-time high whereas China’s Shanghai Composite Index is down 65 per cent from its life-time high mainly due to the sudden slowdown and concerns emanating from increased default risk by the Industrial and Commercial Bank of China. This has, in turn, made India a more attractive investment destination for foreign institutional investors (FIIs). The country’s fortunes are getting further bolstered by increasing exports of goods and services mainly on account of recovery in the US economy.
However, India’s dependence on FII flows is amongst the highest in the emerging markets and that puts it at the grave risk of a bloodbath in case of even the slight reversal of flows. Such a reversal may, in fact, be triggered by an event such as not getting a stable government in place post the general elections or the like. Though it’s a different matter that the stability of the government may not be able to ensure that things will improve as has been the case with UPA II. Also, the fact that FIIs’ holding in corporate India is already at its all-time high furthers the risk of reversal and consequent downside.
The outlook for fiscal 2014-15 looks otherwise positive especially from the second half and the growth forecast of 5.6 per cent as projected by various agencies looks reasonably achievable. The performance of corporate India for the December quarter has been better than expected. This, after several quarters of decline, considerably reduces the chances of any further earnings downgrade. However, the risks of over-leveraged sectors such as power, infrastructure, etc., and their consequent impact on the banking sector remains potent. The short term debt still accounts for 61 per cent of India’s total forex reserves. But the stability in the rupee and the falling rate of inflation will at least ensure that there are no further rate hikes by RBI if the cuts do not get materialised too soon.
The good thing is that RBI Governor took urgent steps to tame inflation compromising with slowing consumption and economy and improved the dollar reserves by US$35 billion through NRI bonds. The country can further take solace in the fact that rural demand still remains strong. The market is decisively in for a long-term bull run and those in the bearish mood are likely to miss the bus as they did in 2003.
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