Its hard to be pessimistic when things seem to be going so well. Headlines like Iceberg ahead?,of course in the global context may be justified but its not easy to be bearish about India. Comparisons beween May 2010 when foreign investors pulled out $2 billion and September 2008 when they sold around $1.8 billion worth of Indian stock,seem a little far-fetched. Problems in the Eurozone are for real but the direct impact of a European slowdown,as BoA Merrill Lynch points out is 30 basis points of growth. The economy is clearly back on the rails,never mind that private consumption may have grown a disappointing 2.6%,the lowest since June 2002; brisk car and two wheeler sales are evidence that demand is robust. Moreover,the uptick in investments,at 17.7% in the three months to March 2010,has been beyond expectations and evidence that the infrastructure build-out is happening. So the countrys on track for an 8% kind of growth in the next few years. While the growth in non-food credit at just under 19% comes off a low base,banks loan books are growing. So even if interest rates rise by about 100 basis points,which seems unlikely now,it shouldnt really upset the corporate applecart. With demand strong,its possible that core inflation could remain above the central banks comfort levels. However,the good news is that it could also taper off thanks to the drop in prices of commodities as also in those of agricultural goods. Should that happen,interest rates are unlikely to rise as fast and by as much as they were expected to. Also,most global economies will now delay their rate hikes. According to Morgan Stanley,recent global uncertainties have made it likely that major econmies will continue providing XXL liquidity. Their act of keeping monetray policy ultra-loose will make it more difficult for other nations to hike interest rates and tighten their own monetary policy even if those other nations economies argue for tightening. When recovery in the major economies seemed on track as many as 13 central banks were expected to raise rates in the third quarter of 2010;that number has now fallen to six. Which means interest rate hikes cant be expected from any of the major developed economies till 2011. In India bond yields have been flat after the government mopped up about Rs 60,000 crore from the auction of 3G licences; the governments finances will also be under a lot less pressure if crude oil prices stay benign and it may end up borrowing less than the Rs 3.4 lakh crore that it intended to leaving more money for the private sector to use. Thats important because capital is scarce and India needs about $50 billion dollars of capital every year to fund growth.While FDI flows are likely to be stable,theres concern that FII flows may taper off as risk aversion rises across the globe and fund managers take money off the table. Its possible the US markets could come off by another 15-20% and if that happens theres no way the emerging markets will go unscathed. But the strong growth story--earnings should grow at 20-25% this year- will ensure that India continues to be a relative outperfomer even if it is more expensive than its peers.
