Foreign funds poured into Indian stocks, lifting the benchmark index to its best quarterly rise in two years, as an array of indicators showed the $2 trillion (Dh7.34 trillion) economy was on course for robust growth in a world that is grappling with uncertainty over Brexit.

A pay rise for central government employees approved by New Delhi totalling Rs849 billion (Dh46.31 billion), including arrears, in the year through next March should boost consumer spending on a wide range of goods. The payout, to 4.7 million workers and 5.2 million pensioners, could rise to at least Rs1 trillion if other allowances are approved, Finance Minister Arun Jaitley said.

Companies such as makers of cars, motorcycles, home appliances, consumer electronics, personal grooming as well as builders are salivating at the potential demand. According to securities firm PhillipCapital Ltd higher salaries will boost consumption by as much as 1.5 percentage point in 2016-17 and contribute about 0.35 percentage point to gross domestic product. The savings rate is seen rising to about 30.4 per cent of GDP from about 30 per cent.

“I would love to be in India today, rather than in London,” Dominic Johnson at Somerset Capital Management told ET Now television channel. “I think the stock market is looking extremely interesting. It is never the cheapest market in the emerging markets, but if you separate the fact that Brexit could easily lead to a global recession, it will not be great for commodity producers, but for countries like India.”

A Reserve Bank of India study said the corporate sector has “signalled a turnaround”, with sales growing in January-March after four successive quarters of contraction.

“Operating profit growth continued to improve at the aggregate level and across all sectors, mainly on account of improved sales growth and continued contraction in raw material expenses,” it said.

Gaining momentum

The top-30 Sensex, which is mimicked by foreign funds, erased all losses in the aftermath of Brexit panic and soared 2.8 per cent over the week to 27,144.91, its highest close since last July. The benchmark gained 6.5 per cent during the June quarter in its best showing since a 14 per cent rally in April-June 2014 when Prime Minister Narendra Modi won a landslide victory in national elections.

The broader 50-share Nifty index climbed to a 10-month high, and closed at 8,328.35, up 2.5 per cent over the week. The rally was helped by foreign buying of stocks worth $552 million (Dh2.02 trillion) in June, marking a fourth successive month of inflow.

A slew of reforms initiated by New Delhi have revived optimism about the outlook. On Wednesday, the cabinet approved a new mineral exploration policy that will reduce the time needed for companies to get permission and allow them to receive royalties. Deccan Gold Mines, the only listed gold miner, jumped 23 per cent over the week and Vedanta Ltd rallied 15 per cent. Hindalco and NMDC gained 6.8 and 4.25 per cent respectively.

Earlier in June, the government eased foreign investment rules in airlines, defence-equipment makers, food processing and direct-to-home TV among others.

In the parliament session beginning on July 18, the administration is scheduled to bring a much-debated Goods and Services Tax (GST) bill for approval of lawmakers. The legislation has been held up by the opposition Congress party in the upper house where it still commands sway after being humbled in the lower house at the hustings.

The GST aims to remove hurdles in the way of free movement of goods across the country, bolster the manufacturing sector, accelerate economic growth and enable better tax compliance.

Monsoon cheer

Topping all the positives for the Indian economy is the monsoon, which has picked up after a delayed start. The annual four-month rainfall is crucial for the country where more than 70 per cent of the 1.3 billion people depend on farm-related activity for their livelihood.

After two consecutive years of drought that caused rural distress, the June-September rains this year is forecast to be above normal. Bountiful showers will boost farm output, help put a lid on food inflation and drive up rural incomes.

According to the latest report of the National Sample Survey Organisation under the Ministry of Statistics, rural spending is converging with urban lifestyles. Demand for microwave ovens to laundry services, air travel and eating out is catching up in rural households. Most companies depend upon demand from villages and semi-urban regions and the survey augurs well for their outlook.

Manufacturing activity climbed to a three-month high in June, powered by stronger demand, a private survey showed. The Nikkei/Markit Manufacturing Purchasing Managers’ Index rose to 51.7 in June from May’s 50.7, its sixth month above the 50 mark that separates growth from contraction.

“The domestic market continues to be the main growth driver, as the Indian economic upturn provides a steady stream of new business,” Markit economist Pollyanna De Lima said in a statement. “There were also signs of an improvement in overseas markets, as new foreign orders rose. However, it looks as if lacklustre global demand remains a headwind for Indian manufacturers.”

Brokerage picks

Citigroup has maintained a buy on Bharti Infratel with a 12-month price target of Rs480. The company, one of India’s largest tower infrastructure providers, was founded by Bharti Airtel, the country’s leading mobile services provider. The stock, which has been under pressure due to rental negotiation concerns, closed at Rs.350.20 on Friday.

The industry structure suggests bargaining power should be with tower companies. The transition impact to the new rental arrangement will be back-ended, the US investment bank said in a note.

Sobha Ltd, one of India’s leading real estate developers, is favoured by Morgan Stanley. The Gurgaon launch in the national capital region is seen helping to revive its pre-sales growth. The brokerage has estimated Rs3.5-4 billion upside for the company over the project life-cycle, and has set a 12-month target price of Rs407 for the share, which closed at Rs323.30 on Friday.

The company began in June the handover of the first phase of the Gurgaon project, which is spread across 150 acres and offers presidential villas, duplex villas and super luxury row houses.

Brokerage CLSA has maintained its buy recommendation on Grasim Industries, saying that its viscose staple fibre (VSF), a man-made, biodegradable fibre with characteristics akin to cotton, is likely to drive growth.

VSF volumes are expanding 13 per cent at compounded annual growth rate over the past four years compared to 1-2 per cent in a previous decade, CLSA said. It has set a 12-month price target of Rs.5,750, almost 24 per cent higher than Friday’s close of Rs4,644.

Meanwhile, Mahanagar Gas made a dazzling market debut, rocketing 24 per cent to Rs520.30 from its IPO price of Rs.421. The company’s founders pocketed Rs.10.4 billion last month selling 24.7 million shares. The offering was oversubscribed 64.5 times.

— The writer is journalist based in India