The BlackRock Investment Institute’s latest paper – Under New Management, Outlook For India’s Markets –discusses the market opportunities in India following the recent election of Prime Minister Narendra Modi.
India has gone from a castaway market to investor darling – in the space of a year. The election of Prime Minister Narendra Modi and the appointment of economist Raghuram Rajan as head of the Reserve Bank of India (RBI) have much to do with it.
Modi and Rajan have set in motion an apparent virtuous cycle: increasing business confidence, accelerating economic growth, deficit reduction, receding inflation, a stable currency and inbound investment. Modi is acting as a hands-on CEO. He has revived stalled investment projects, further curbed government spending and initiated many small changes that make it easier to do business.
India’s economy is now at an inflection point. Under Rajan’s watch, inflation is coming down, real interest rates have turned positive and the currency has stabilised. But risks remain and include a re-run of the 2013 bloodbath in emerging markets in anticipation (or fear) of a US rate rise because, while India is in better shape these days, the country is still dependent on external funding. We also have yet to see progress on structural reforms and resolving policy ambiguities in the power sector. The next six months are therefore crucial for investor confidence. Markets are anticipating a clear policy road map in the November-February parliamentary session and budget presentation, as well as rate cuts in 2015. Bottom line: Markets need performance above promise.
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