Markets in India set to hitch ride on economic reform

Mumbai: Raging bulls should keep Indian shares firmly in the stratosphere in the coming weeks, buoyed by signals the re-elected government in New Delhi aims to push economic reforms forcefully in its second term.

The coalition government, led by Prime Minister Manmohan Singh's Congress party, made it clear after taking office last week that its main focus would be to stimulate growth, lower borrowing costs, generate jobs and remove obstacles.

"One of the first steps I propose to take is to meet bankers and get them committed to a more benign plan of action," Finance Minister Pranab Mukherjee said last week.

The Reserve Bank of India has slashed its short-term lending rate by 425 basis points to 4.75 per cent since October to bail out the economy from a slowdown caused by the global economic crisis. But commercial banks have been circumspect, with the State Bank of India having reduced its prime rate only by 150 basis points to 12.25 per cent.

"While much has been done in the last eight months, and international capital flows have resumed, the cost and the speed with which finance can be accessed remains a matter of concern," Mukherjee said.

India's $1.3 trillion (Dh4.7 trillion) economy grew 5.8 per cent in the March quarter, faster than estimated by economists, and only below the 6.1 per cent rise registered by China among major world economies. By comparison, the United States GDP contracted 5.1 per cent.

"There's greater resilience in domestic demand," said Tushar Poddar, economist at Goldman Sachs. "We expect activity to pick up in the second half of fiscal year 2010."

With a stable government freed from the shackles of communist allies who had stalled all reforms during its first term, expectations about easier foreign investment rules in sectors from insurance to banks and infrastructure have received a boost.

The widely followed top-30 Sensex vaulted 28.3 per cent in May - the biggest monthly gain since March 1992 when Singh, who was then finance minister, junked decades of inwardly-looking socialistic controls and unveiled a liberal budget opening up the economy to foreigners.

Almost a fifth of the rise has come in the past two weeks after the election win. The Sensex has leapt 82 per cent from its March low and is up 52 per cent this year after plummeting over half in 2008.

"I think it's a good time to take a break and maybe have a correction, but there's still a lot of money waiting in the wings," market guru Mark Mobius told CNBC TV18. "So& better not get too much in cash if you are fully invested at this stage."

Mobius, executive chairman of Templeton Asset Management Ltd, who is bullish on emerging markets, said China was his top picking because of the tremendous growth potential it offered.

"India is relatively expensive compared with the emerging markets, but the prospects in view of the political changes that we have seen are very, very good," he said. "So I would say India would be the next place to look at and then there would be Russia."

Foreigners ploughed a little over $4 billion into the market in May, taking inflows since mid-March to around $6 billion. Analysts are betting the investment could treble in the coming months, if the government speeds up stake sales in state companies.

Oil Minister Murli Deora said on Friday the cabinet would consider within six weeks a proposal to free up pricing of petrol and diesel, allowing refiners to fix prices every week based on world trends.

India imports about 70 per cent of its oil, but fuel prices are set lower by the government for the domestic consumer.

- The writer is a journalist based in India.