After weathering the storm caused by a surprise rate increase, Indian shares can hopefully look forward to consolidating, as investors bet on the underlying strength of the fast-expanding economy and the potential earnings upside.
Large foreign funds are leading the charge, having already poured in $3.9 billion (Dh21.34 billion) since the start of January after buying $17.5 billion of Indian equities in 2009. And there is a growing belief that rate increases and withdrawal of economic stimulus packages will temper growth in a positive way and help avoid asset bubbles.
There are signs of companies stepping up capacity utilisation to meet demand and some sectors have started work on expansion projects, both indicating a robust economy.
Prime Minister Manmohan Singh, who is also an economist of repute, has said gross domestic product growth could top 8.5 per cent in the financial year starting in April. Foreign investors are clearly taking note.
Potential
"The external perspective of India in the rest of the world has been growing very rapidly and part of that is to do with the strength of the Indian economy," Barclays Chairman Marcus Agius told reporters in Mumbai on Wednesday. "We see India as a country with enormous potential."
The second-largest British bank, which plans to double its investment banking team in India, said last month it would invest £350 million over the next five years to expand its wealth management unit.
"Our business here is successful and we want to see it grow," Agius said.
Standard Chartered is planning to list in India and Goldman Sachs has applied for a banking license to gain a foothold in Asia's third-largest economy.
Japan's Suzuki plans to spend about 25 billion yen to double production of engines in India, Chairman Osamu Suzuki told reporters near Delhi last week, while its subsidiary Maruti Suzuki — India's largest car maker — aims to invest Rs17 billion to increase capacity by a quarter million.
Prime Minister Singh said last week India must double spending to $1 trillion on roads, ports, power and other infrastructure in the five years beginning 2012 to help lift economic growth to 10 per cent.
Investments in ports are expected to reach Rs407 billion over the five years to 2012, the panel said, while funding for roads and bridges is projected at Rs2.8 trillion. Much of the development is happening with active participation of the private sector and the potential for further growth is enormous.
The top-30 Sensex shrugged off early shocks from a 25 basis points increase in key interest rates by the central bank and notched a 0.4 per cent rise last week — its seventh consecutive weekly gain — to 17,644.76.
"There is support coming in at the dips," said equity trader Anmol Patel.
"It is a strong sign of the market's underlying strength and should lay the foundation for another bull run."
On the flip side, the Reserve Bank of India (RBI) has indicated a shift in stance to curbing price pressures than pushing for growth. It raised rates on March 19, a month ahead of its scheduled policy review, and it is widely expected to announce another quarter point hike on April 20.
RBI Governor D. Subbarao said policy moves usually produces results after a lag and any delay could have caused the risk of a "hard landing" when rates had to be raised sharply.
"Given the emergent pressures on the inflation front and the large fiscal borrowing programme, there are likely to be pressures on yields, which may have some impact on the cost of funds of banks," the RBI said in a statement.
The government is set to borrow a net Rs3.45 trillion from the market in 2010-11 starting from April, compared with a net Rs3.98 trillion in the previous year, while wholesale price based inflation in February was almost 10 per cent.
The writer is a journalist based in India.
