Shrugging off a surprising sharp drop in the pace of India’s economic growth, fund managers are looking to expand their exposure to Indian equities as they keep their eyes focused on an expected pickup in business activity in Asia’s third-largest economy.

Official data released on Thursday showed the $1.3 trillion economy grew at its slowest in more than three years, at 5.7 per cent in April-June, as dealers and companies were busy clearing their inventories ahead of the Goods and Services Tax (GST) on July 1. Lingering effects of last November’s demonetisation may have also weighed.

Growth in the same period a year earlier was a robust 7.9 per cent, and 6.1 per cent in the preceding March quarter.

“Slowdown in GDP growth in the first quarter (of 2017-18 financial year) is a matter of concern. In the coming quarters we need to work more on policy and investment to improve the figures,” Finance Minister Arun Jaitley said.

The data, as well as a central bank report that showed New Delhi’s decision to scrap high-value bank notes that comprised 86 per cent of the currency in circulation had not achieved the lofty goals it was meant to, had no impact on the stock markets. The top-30 Sensex climbed for the fourth time in five trading days on Friday, gaining 0.9 per cent over the week to 31,892.23. The 50-share Nifty rose 1.2 per cent to 9,974.40.

Both the indices notched gains for the third successive week. Yet this rise could not camouflage the tumble after the benchmarks hit record highs early in August and triggered heavy profit-taking. The Sensex and the Nifty posted their biggest monthly fall last month since last November, a shakeout that probably tempered exuberance.

Obviously, investors are looking ahead and not minded by what has gone by. Securities firm UBS believes that despite the gradual pace of recovery on the ground, the structural reforms rolled out by the government such as GST, adoption of inflation targeting, new bankruptcy code, financial inclusion, FDI liberalisation, measures to curb unaccounted cash and digitisation, should help improve productivity dynamics and lay the foundation for sustainable growth.

Morgan Stanley said the fallout of demonetisation and concerns about GST implementation were “idiosyncratic factors” that were now “in the rear view mirror”, pointing out that underlying demand remained strong as evidenced from the “robust growth” in discretionary spending. As the negative factors wears off, economic growth should accelerate.

The key risks to growth, the US investment bank said, include the impact of a weaker monsoon on farm output and the pace of bad loan resolution which would impact credit growth and private capital expenditure.

Factory activity rebounds

The reasoning seemed justified when a respected private survey showed factory activity in August rebounded robustly from a contraction in July, bolstering prospects for a recovery in overall economic growth in this quarter.

The Nikkei/Markit Manufacturing Purchasing Managers’ Index surged more than three points to 51.2 in August from 47.9 in July, registering the biggest one-month jump in 5-1/2 years.

“In July, firms indicated that orders, production and purchasing had been postponed due to a lack of clarity about the new tax regime, but they have now been resumed as manufacturers, suppliers and their clients have become more knowledgeable of the GST rates,” Pollyanna De Lima, economist at IHS Markit, said in a statement.

“All sub-sectors posted substantial recoveries, with capital goods outperforming its consumer and intermediate goods counterparts regarding growth rates for production,” she wrote.

Autos in top gear

Sales of automobiles in August accelerated, underlining the strong consumer demand in a country where the growing middle-class number more than 300 million people.

Maruti Suzuki, which makes every second new car sold in India, said its total sales rose 23.8 per cent to 163,701 units, with domestic sales climbing 2.7 per cent to 152,000. Sales of its compact cars — Swift, Ritz, Celerio, Ignis, Baleno, Dzire, Tour S — jumped 62.4 per cent. Maruti shares rallied 1.4 per cent on Friday to Rs. 7,812.70, swelling the gains in 2017 to 46.8 per cent.

Shares in Tata Motors surged 3.8 per cent on Friday, the most in more than two weeks, to Rs. 390.70 after August vehicle sales rose 14 per cent to 48,988 units, with domestic sales up 26 per cent at 45,906. Sales of medium and heavy trucks — an indicator of stronger underlying economy — jumped 52 per cent to 10,926.

Smaller rival Ashok Leyland said its sales raced 25 per cent to 13,634 vehicles, with medium and heavy vehicles rising 29 per cent to 10,567. Its shares gained 5.4 per cent on Friday to Rs. 112.85. Leading utility vehicles maker Mahindra & Mahindra reported a modest four per cent rise in August sales to 42,116 vehicles.

Bajaj Auto said its motorcycle sales grew 1.4 per cent in August to 283,861 units, while commercial vehicles sales rose 12.6 per cent to 51,170.

Cabinet reshuffle

A key event that will be watched by market participants is a revamp of Prime Minister Narendra Modi’s cabinet, expected on Sunday morning. The reshuffle is aimed at weeding out non-performers, bring in new blood, ensure policy initiatives are implemented in right earnest — all to tidy up the image of the administration that has less than two years of its five-year term remaining.

For the markets, the focus will be on the personalities that will be given charge of crucial ministries. The government has undertaken several measures to tear down red-tape and barriers, opened up sectors to foreign and private participation, jump-started investment in infrastructure as well as chalked out plans to clean up the mess of bad loans.

Still, the progress in many spheres such as skill development, job creation, cleanliness drive and linking rivers has been tardy.

A new industrial policy, tailor-made to enable Modi’s vision of making India a manufacturing hub, is in the works. The current policy was set in place in 1991, when New Delhi debunked more than four decade old inward-looking socialist mantra and embraced a more open economy, paving the way for faster economic expansion.

“With strong macroeconomic fundamentals and several path breaking reforms in the last three years, India is equipped to deploy a different set of ideas and strategies to build a globally competitive Indian industry,” the Department of Industrial Policy and Promotion under the Ministry of Commerce said in a statement.

The policy is expected to be unveiled in October.

The writer is a journalist based in India.