After posting their first weekly rise in five weeks Indian shares are poised for more gains, supported by saner valuations and robust domestic fund demand. However, there will be caution as market players await the outcome of US Federal Reserve’s rate-setting meeting, which would keep foreign institutional investors on tenterhooks.

Stronger-than-expected factory data, bearish outlook for global crude oil prices and mounting pressure on the Reserve Bank of India to lower borrowing costs are all factors that would underpin stocks. A big correction in share prices — down 15 per cent from the heady days in early March — makes the market attractive, especially as domestic growth is on track to pick up while much of the world struggles.

Data released after the market closed for trading on Friday showed industrial output in July expanded 4.2 per cent, beating economists’ forecasts of about 3.5 per cent. Capital goods output, a crucial indicator of underlying strength, leapt 10.6 per cent and electricity generation expanded 4.2 per cent and consumer goods climbed 1.3 per cent.

Cash-flush domestic mutual funds have been big buyers through the Chinese crisis-triggered sell-off by foreign institutional investors, and market gurus expect demand to rise on the back of strong outlook for returns that Indian shares offer. The top-30 Sensex gained 1.6 per cent and the broader 50-share Nifty climbed 1.75 per cent, registering their first weekly rise in more than a month.

“The long-term story for Indian equities remains intact, notwithstanding near-term earnings disappointments. Structural positives of lower inflation, demographics-driven developmental politics and rising domestic equity inflows suggest a bright outlook over the longer term,” Mahesh Nandurkar at securities firm CLSA said in a report dated September 11.

“We expect 16-18 per cent corporate earnings growth over financial years 2018-19, with the market delivering a cumulative 30 per cent plus return by September 2017. Our preferred stock ideas to play the theme are Bharti Airtel, ICICI Bank, HDFC Bank, Larsen & Toubro, Maruti Suzuki, UltraTech, PVR and Zee.”

Despite political wrangling holding up key legislation needed to remove bottlenecks for faster growth, lawmakers are increasingly coming under pressure to perform or perish. As more than half of India’s 1.2 billion people are below the age of 25, the main focus for governments is shifting to creating the environment for investment and jobs.

“Prime Minister Narendra Modi’s ‘Make in India’ programme is largely a job-creation strategy which is showing signs of early success. Developmental politics is also visible at the state level, where governments compete for investments. Several are adopting an investment-driven employment growth approach which should help nudge economic expansion upwards,” Nandurkar wrote.

Fed watch

The Federal Reserve is set to decide on September 16-17 whether to raise US interest rates for the first time in nine years. There is no clarity on the outcome of the meeting, which will be single biggest factor for markets across the world in the coming week.

Some Fed officials have sounded hawkish and a surprising drop in the US jobless rate to 5.1 per cent and an upward revision in US second-quarter growth to 3.7 per cent support calls for a hike. However, a US rate rise would have international ramifications and trigger an outflow of funds from emerging markets to America at a time when the world economy is wobbly.

That is why there are calls for restraint, particularly because of the economic slowdown led by China, the collapse of commodity prices, dwindling world trade and the bleak outlook for resource-exporting countries as well as other nations.

“The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly,” Kaushik Basu, the World Bank’s chief economist, told the Financial Times newspaper.

He said the Fed should hold off raising rates until the global economy was more stable. “I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence.”

On Friday, Goldman Sachs warned that crude oil could tumble as low as $20 (Dh73.40) a barrel, underlining however that this was not its “base case”. The US investment bank cut its 2016 forecast for US crude to $45 from $57, and Brent to $49.50 from its earlier forecast of $62.

“The oil market is even more oversupplied than we had expected and we forecast this surplus to persist in 2016,” Goldman said in a report titled “Lower for even longer”.

India rates to drop

For India, which imports 80 per cent of the oil it consumes, subdued world prices are a big bonanza. Besides keeping current account deficit within limits, lower fuel costs would help keep inflation muted — a condition for easing monetary policy.

Arvind Panagariya, who runs NITI Aayog or planning commission, said a 50-100 basis points rate cut was needed to bolster the economy.

“The case for cutting rates is so strong,” the former US-based economist who joined Prime Minister Narendra Modi’s administration in January, told CNBC-TV18. “Whatever, the Fed does, we are ripe for a 50 basis point rate cut,” said Panagariya, who holds the rank of a cabinet minister.

The Reserve Bank of India is scheduled to review policy on September 29 and most economists expect a 25 basis points rate reduction. The central bank has lowered its main repo rate by 75 basis points since mid-January.

Brokerage CLSA believes that if the consumer price index stabilises at about 5 per cent, the repo rate may come off from 7.25 per cent by another 75-100 basis points over the next two years.

Investment themes

While the federal government in New Delhi is bogged down by political logjam in parliament, state governments are spearheading growth plans in an impressive way. Uttar Pradesh, the country’s most populous and a long-time laggard in economic development, has taken a leaf out from business-friendly states such as Gujarat.

The northern state has acquired almost all of the 3,500 hectare land needed to build a 300 kilometre expressway between Lucknow and Agra in about a year’s time by paying adequate compensation. Andhra Pradesh has taken control of 30,000 acres to build a new capital in Amravati in less than a year by offering developed residential and commercial plots in exchange for land surrendered.

The lead set by Rajasthan in labour reforms — a hot potato in India — is being copied by Madhya Pradesh and Maharashtra, all states controlled by the Bharatiya Janata Party. The initiatives and reforms are the building blocks to accelerate investment, and will force other states to follow suit or risk being left behind in the growth table.

“We believe that a combination of low commodity prices, rising demand and project completions will drive higher margins and consequently higher returns on equity across the board, eventually triggering the next investment cycle,” CLSA’s Nandurkar said.

Infrastructure developers, financiers and corporate lenders could benefit from the government-led push to build roads, cities and dedicated freight corridors. Besides, engineering and construction conglomerate L&T and private-sector banks, other companies that stand to benefit include top cement producer UltraTech, Adani Ports and State Bank of India, according to CLSA.

The brokerage also likes Jubilant, which has the franchise for Domino’s Pizza in India, and kitchen-appliance maker TTK Prestige among discretionary spending themes.

The writer is a journalist based in India.