Better-than-expected economic data helped Indian shares rebound strongly from an early slide in the week to Friday and high expectations about the coming annual budget should underpin the market that has received foreign portfolio investments of around $7 billion (Dh25.6 billion) into stocks and debt securities since the start of January.

According to a new methodology adopted by New Delhi-based Central Statistical Office, India’s GDP grew 7.5 per cent in the December quarter — making the country the world’s fastest expanding major economy, outstripping China’s 7.3 per cent rise — and forecast 2014-15 growth at 7.4 per cent.

Retail inflation as measured by the consumer price index came in at 5.11 per cent for January, up from 4.28 per cent in December but lower than market expectations and well off the central bank’s 6.0 per cent medium term target, bolstering the prospect for interest rate cuts as early as in March.

Another data released on Friday showed January’s trade deficit shrank to an 11-month low at $8.32 billion, thanks to the slump in prices of global oil — the country’s single-largest import item. The data is good news for the current account balance and the rupee, and also provides leeway to the Reserve Bank of India to lower rates.

“The economic indicators have breathed new life just when the markets were on a fulsome retreat,” said equity salesman Mukesh Dalal. “There is renewed hope now and the next big trigger will be the budget, which everyone hopes will be growth-oriented.”

Little surprise the top-30 Sensex rebounded 1.3 per cent over the week to close at 29,094.93 after sliding to 28,183.32 at one stage. The broader 50-share Nifty gained 1.7 per cent to 8,805.50, well off 8,470.50 it struck after an upstart political party scored a thumping victory in Delhi assembly elections.

A stellar performance by State Bank of India, the nation’s biggest lender, which reported a 30 per cent jump in December quarter profit and kept its bad loans within control, has also raised hopes for a turnaround in the financial sector. Improving growth should help companies clear off debts and as business confidence rises there will be greater demand for new loans.

Debt-ridden wind turbine maker Suzlon Energy Ltd should also get a shot in the arm after it said late on Friday that Sun Pharmaceutical Industries founder and India’s second-richest man, Dilip Sanghvi, agreed to buy a 23 per cent stake for about $290 million. Suzlon shares had climbed about 15 per cent in the past week on media speculation about Sanghvi’s interest.

Budget, political risk

The budget due on February 28 undoubtedly will be the main driver for financial markets, but there are some concerns after the resounding defeat of the business-friendly Bharatiya Janata Party (BJP) in provincial elections to the Delhi assembly put the spotlight on political risk, a factor that could throw a spanner in the path to hard-nosed reforms that aims to raise tax revenues, curtail populist subsidies, improve government finances and channel cash into productive spheres such as infrastructure.

Investors, especially large foreign funds, are heavily overweight on India on the presumption that the budget would unleash animal spirits among the entrepreneur class and help lift economic growth onto the trajectory of double-digits in the years to come.

“The upcoming budget could be the most important one for the stock market after the early 1990s, when India launched economic liberalisation,” Morgan Stanley equity strategists Ridham Desai, Sheela Rathi and Utkarsh Khandelwal said in a report.

“The government could undertake the next generation tax reforms by simplifying the tax code and/or cutting tax rates to stimulate the economy, is likely to unleash expenditure reforms especially in subsidies, could selectively spend money on key infrastructure projects and continue on the path of fiscal consolidation.”

“Of all these possibilities,” the analysts noted, “we think the market’s near-term attention will be on potential tax cuts and an absence of populist fervour.”

The series of record highs mounted by the Sensex and the Nifty over the past month were driven by high expectations on the budget, which would be the first full one by Prime Minister Narendra Modi’s government that took office last May after notching a single-party majority in national elections in 30 years.

Cross hairs

Tuesday’s stunning victory by the Aam Aadmi Party (AAP), or Common Man’s Party, in the Delhi assembly elections — it grabbed an unprecedented 67 of the 70 seats, humbled the BJP to the remaining 3 seats and swept away the Congress party that had governed the national capital region for 15 years until 2013 — has the potential to upset the applecart.

The AAP’s overwhelming win has opened an old wound of the BJP. In 2004, the relatively successful administration of the then BJP-led coalition was booted out in general elections because its “India Shining” slogan was seen as ignoring the country’s poor. In other words, the many growth reforms it implemented had not percolated to those at the bottom of the pyramid.

One plank that won the hearts of voters for AAP was its promise of lower electricity bills, free basic water supply and other measures that may be called populist. Sonal Varma and Aman Mohunta at Nomura said that there are fears that this might push BJP to renege on fiscal reforms that will require spending cuts on misdirected subsides and welfare schemes.

“The union budget is likely to reveal whether BJP will turn populist or stick to the fiscal discipline,” the analysts wrote in a report to their clients. “Our bias is the latter.”

Finance Minister Arun Jaitley also stepped in to soothe nerves. “We believe that the kind of economic reforms we have undertaken are certainly going to bring in investment, generate jobs, improve the quality of life of people and also help us alleviating poverty levels,” he told a news conference.

“And therefore the fact that four elections have been won, and one has not been won, is absolutely no ground for believing that there would be any slowdown on the path that we have undertaken.”

Indeed the government can ill afford to jeopardise the buzz it has generated among the investing classes. Out of the $42 billion India received in foreign portfolio investments in 2014, as much as $26 billion came from investors in bonds.

“These investors have put their faith in the government’s promise to keep macroeconomic policy aimed at preserving stability and focus on reforms to boost growth,” Jahangir Aziz, chief Asia economic at JP Morgan, wrote in an article in the Indian Express.

“Any sign of the government wavering on this promise will weaken foreign investors’ faith.”

The writer is a journalist based in India.