A record pace of industrial growth in December should underpin Indian shares when they open for trade on Monday after a three-day weekend, but unless foreign portfolio investors resume their buying the market will find it difficult to sustain the gains.
Data on Friday, when the markets were closed for a holiday, showed Indian factory output soared an annual 16.8 per cent in December, soundly beating economists' expectations for around 12 per cent. It was the highest reading since the current series began with 1993-94 as the base year.
"We should see a big-jump start," said equity trader Anmol Dalal. "Clearly, the growth was well above street estimates and shows our growth trajectory is picking up quicker than most people expect."
Analysts said the factory growth surge underscored Asia's third-largest economy was on course to follow bigger rival China as the world's fastest expanding, and strengthened the case for the government to begin unwinding some of the stimulus measures that were put in place in 2008-09 to shield the country from the biggest global financial crisis since the 1930s.
This could come in the annual budget on February 26, when the cash-strapped government walks a tight-rope to rein in a big fiscal deficit expected to reach 16.8 per cent of GDP in 2009-10 and ensure growth is not jeopardised.
"The budget can attempt a roadmap for exit," said C. Rangarajan, chairman of the prime minister's Economic Advisory Council, referring to the stimulus. Since December 2008, India has announced stimulus packages equalling about 12 per cent of GDP to boost infrastructure and support economic recovery.
The Reserve Bank of India could, however, hold off an interest rate increase until the next policy review in April.
"The outturn for December is impressive... and will strengthen the hand of the fiscal and monetary hawks in the Reserve Bank and government," HSBC economist Robert Prior-Wandesforde said in a note. "That's not to say an immediate interest rate response is likely."
The top-30 Sensex notched its first weekly rise in four last week, but trading was choppy with foreigners continuing to unwind on the back of the debt crisis in many European countries.
Greece, Spain and Portugal are facing an uphill task on debt repayments and although the European Union and the International Monetary Fund made the right noises last week to bail out Greece, there will have to be more concrete evidence on the ground to ease investor jitters.
Foreign funds have withdrawn more than $2 billion (Dh7.34 billion) from Indian stocks over the past 15 trading sessions, data from the Securities and Exchange Board of India showed.
EPFR Global, the Massachusetts-based research firm that tracks fund flows, said outflows from emerging-market equity funds reached $2.9 billion in the week to February 10, the most in 19 months.
For long-term investors, however, India should be a good bet with its strong growth offering the potential for good returns.
Citigroup India economist Rohini Malkani said she expected the GDP to expand 8.4 per cent in 2010-11. Finance Minister Pranab Mukherjee has said growth would reach 7.75 per cent in 2009-10, higher than the government's forecast for 7.2 per cent.
Malkani said her forecast "factors in a partial rollback of the fiscal stimulus measures and a minimum 125 basis points of policy tightening".
Goldman Sachs said investors should buy a basket of the Indian rupee, Indonesian rupiah and Malaysian ringgit against the yen as the three Asian economies would grow at a faster pace than Japan.
The writer is a journalist based in India.
