Markets stayed buoyant despite skirmishes at our borders and GDP data surprising on the downside. With so much liquidity on hand, there is no option but to think long term and to ignore short-term bumps on the road. Moreover, the weak growth print has increased the chances of policy rate cuts from the RBI, which works in the Equity markets’ favor. We believe that activity in manufacturing has recovered from the depths of demonetization, but has lost some momentum recently due to finished stock inventory draw down ahead of key regulatory events like BSIV and GST. This impact should normalize in the coming months. Still, weak investment remains an overhang on growth, which can only be cured by a sustained consumption uptick. The RBI could be persuaded to do more to spur consumption, it has the space to cut policy rates by another 50bp and yet maintain a neutral stance in our view.
On balance, we still believe that a predominantly consumption led growth recovery remains on the cards, with 7.5% and 7.8% GDP growth expected in FY18 and FY19 respectively. 80% remonetization, favorable outlook on monsoons, falling credit costs and moderate fiscal stimulus from GST rates provide the basis for continued growth recovery. However, shaky consumer sentiment, pending resolution of bank NPAs, imports rising faster than exports are factors that place a drag on growth. Investments will likely recover on the back of this uptick as capacity gaps narrow.
Watch out for: Clarity on GST rates around 3 June, RBI policy rate on 7 June, ECB monetary policy on 8 June and MSP policy for kharif season.
India
NRI
