Reforms and good monsoon support India’s medium-term outlook

Dubai: Recent economic reforms, particularly the tax reforms and a good monsoon this year is expected to boost the prospects of Indian equities this year, according to fund managers and market strategists.

India’s benchmark stock index is projected to reach a record high by year-end, driven in part by confidence that the government will likely pass through major reforms, according to a recent Reuters poll.

While weak corporate earnings and bad loan build on public sector bank balance sheets continue to be a dampener, a good monsoon is expected to support the rural sector.

Indian shares outperformed most of their regional peers in the first half of 2017, as optimism about more economic reforms by Prime Minister Narendra Modi’s government, forecast of a normal monsoon, and bets of interest rate cuts prompted foreign investors to pour billions of dollars into equities.

The benchmark BSE Sensex surged 16.1 per cent in the last six months, hitting record highs, as a robust outlook for the nation’s economic growth continues to attract overseas investors.

The index is now forecast to rise a further 7 per cent to 33,000 by the end of December, according to the poll of 50 strategists by Reutesrs taken between June 19 and 28. It is then expected to reach 34,500 by the middle of next year.

Foreign investors continue to believe in the India growth story, notwithstanding disruptions anticipated to the economy in the wake of the GST implementation, as can be seen from the spike in dollar inflows.

Foreign institutional investors (FIIs) ended the first quart of India’s fiscal year ending June 30 on a high note, with the net inflows (debt and equity) coming in at $12.2 billion (Dh44.8 billion), up sharply from $1.6 billion in the corresponding period last year. Debt contributed the lion’s share, of $10.1 billion in the quarter with equity investments at $2.1 billion.

In the corresponding quarter last year, FIIs pulled out $600 million from the debt market. In June this year, FIIs invested $3.99 billion in debt and $600 million in equity, marking a significant increase from their position last June that saw net outflow of $400 million. It would be interesting to see FII inflows into debt and equity this month, in the context of sentiments and trading being influenced by GST.

The new GST rates will apply to some banking transactions, mutual funds, insurance and stock market which were earlier taxed at 15 per cent.

There is minimal impact from the GST where retail broking is taken in isolation with a small increase in the amount of service tax. The impact on ancillary sectors and the overall industry is more from an aspect of changing policies and implementing new means of calculating tax, which will come with its own learning curve.

The new GST rates will apply to some banking transactions, mutual funds, insurance and stock market which were earlier taxed at 15 percent. In mutual funds, the total expense ratio (TER) charged for managing funds and distributor commissions etc., would increase by 4-5 basis points. TER for mutual funds varies between 1.25 per cent and 2.75 per cent.

Markets will need some time to adjust to the GST implementation process, which could partially hurt corporate earnings. Corporate earnings weakened in the first three month of 2017 as many companies struggled after the government banned high-value currency notes late last year.

Despite the strong medium-term outlook, Reuters poll showed that two-thirds of respondents believe there could be a market correction of up to 5 per cent in the short term, largely driven by poor corporate earnings.