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India Business Forecast Report Q4 2012

India Business Forecast Report Q4 2012 - new country guide report published

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2013-01-01 00:28:55 - India Business Forecast Report Q4 2012 - a new country guide report on

The administration of Indian Prime Minister Manmohan Singh has a small window of opportunity to deliver economic reform in the coming quarters in a bid to re-energise the country´s growth prospects. Success on this front would not only help to ease investor concerns, but would also bolster the Indian National Congress-led government´s re-election chances in 2014. We see sufficient evidence to suggest that India´s investment cycle – the key ingredient for sustainable economic growth – has not only stopped deteriorating but will start to pick up, albeit gradually, in H212.

The major ratings agencies have started to question India´s investment grade status on the back of stumbling economic growth and a weak policy environment. While we had expected the country´s sovereign



creditworthiness to come under the spotlight in 2012, our view remains that a full ratings downgrade is not on the cards this year. The Indian rupee looks set to embark on a steady appreciatory run over the medium term. Current levels are attractive given the currency´s depressed valuations and our conviction that macro pressure will subside in the months ahead. With this in mind, we maintain our fundamentally bullish stance.

Major Forecast Changes

We are projecting that Indian real GDP growth will come in at an improved 6.9% in FY2012/13, up from a nine-year low of 6.5% in 2011/12. Our forecast puts us above consensus, which is around 6.5%. We are now forecasting 50 basis points of cuts in the benchmark repo rate by end-FY2012/13 (April-March), and expect further loosening of the cash reserve requirement ratio. This will take the policy rate to 7.50% by end-FY2012/13. We expect India´s current account shortfall to narrow to 3.1% of GDP from 4.3% in FY2011/12, owing predominantly to the underperformance of import growth. Lower global energy prices, in particular, will provide relief to the country´s oil import bill.

Key Risks To Outlook

Downside Risks To Near-Term Growth Outlook: The risk of continued fiscal indiscipline and the failure to re-ignite reform could lead to persistent inflationary pressure, a prolonged monetary pause and a slower-than-expected turnaround in investment activity. Upside Long-Term Growth Risks From Structural Reforms: Should the government successfully embark on reforms – particularly to investment regulations in the retail and insurance sectors – we may see a sustained increase in foreign direct investment, boosting longer-term growth.

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Mike King
Phone: London: +44 (0) 203 086 8600

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