Momentum is firmly behind Indian shares after they soared to all-time highs this week, drawing more investors onto the bull bandwagon. Better-than-expected quarterly earnings reported by companies and a cut in interest rates have underpinned the market, and expectations are running high on the forthcoming annual budget.

The European Central Bank’s decision to pump one billion euros into the sluggish Eurozone economy between this March and September 2016 should also underpin Indian shares as some of the cheap money would find their way into Asia’s third-largest economy, which is on the road to a fledging recovery.

“We think ECB QE [quantitative easing] should support portfolio equity inflows to Indian markets, despite Fed tightening,” DSP Merrill Lynch economists Indranil Sen Gupta and Abhishek Gupta said in a January 23 note to their clients. “Our equity strategist, Jyoti Jaipuria, is forecasting the BSE Sensex at 33,000 by December 2015.”

The investment house estimates foreign funds to move $25 billion (Dh91.8 billion) into Indian shares in the coming financial that begins on April 1.

The top-30 Sensex shot past 29,000 for the first time ever and the broader 50-share Nifty hit a record above 8,800 after the International Monetary Fund forecast India’s growth rate to surpass slowing China in 2016. If the stocks rally maintains its current pace, the Sensex could easily surge past 30,000 before the budget, which will be presented to parliament on February 28.

Meanwhile, India’s foreign exchange reserves leapt to a record $322.14 billion in the week ended January 16, reflecting strong central bank purchases as foreign inflows climbed strongly, official data released on Friday showed.

The first full-fledged budget since Prime Minister Narendra Modi swept to power last May is widely tipped to unveil the administration’s thrust to revive investment and make the country a manufacturing hub. The budget is also expected to set the ball rolling for more reductions in interest rates by the Reserve Bank of India (RBI), which cut its main policy rate this month for the first time in more than a year citing benign inflation expectations.

“For Indian equities, the new year seems to be continuation of last year’s relative outperformance supported by lower commodity prices, lower cost of capital and expectations of continued policy support,” equity strategists Bijay Kumar, Bharat Iyer and Adrian Mowat at JP Morgan said in a joint report.

They said lower borrowing costs would likely aid an incipient recovery in the investment cycle, especially as the benefit of lower rates is expected to be higher for investment-linked sectors.

“The dynamics in the credit market also suggest that risk appetite has improved and the benefit is moving beyond the highly rated universe. Of the three major determinants of recovery in the capex cycle — policy support, corporate confidence and supportive financial market — all three seem to be moving in the right direction,” the analysts wrote.

Current account surplus

Undoubtedly, the shot in the arm for New Delhi has been the tumble in global commodity prices, particularly crude oil which India imports to feed more than 80 per cent of consumption. India’s current account, which had been in deficit for 10 years and reached a peak shortfall of 5 per cent of GDP in 2012, should swing to a surplus of 0.3 per cent of GDP in 2015, according to Morgan Stanley.

“The substantial improvement in India’s current account deficit bodes well from a macro stability point of view, and comes at a time when the US Fed is likely to embark on a hiking cycle,” economists Chetan Ahya and Upasana Chachra at the US investment bank said in a note.

“In this context, the improvement in the current account balance will protect India from external funding risks and give the RBI comfort in targeting real interest rates at more moderate levels.”

With price pressures well under control, inflation expectations have dropped the most since December 2008, said Radhika Rao, Singapore-based economist at DBS Bank, preparing the space for the central bank to further loosen policy.

“Given the likelihood that 2015/16 CPI estimate will ease to a shade below 6 per cent and the RBI keen to keep the real policy rate at 150-200 basis points, there is room for 50 basis points more cuts by the June quarter,” she said. “This is provided the preconditions of fiscal correction, tabling of a reform-friendly budget and waning inflation hold.”

Infrastructure-linked stocks

As the Modi-led government is poised to step up spending significantly to build smart cities, highways, rail lines, sea-links, airports and power generation, stocks that feed these sectors should offer good investment opportunities for investors.

These include engineering and construction companies, cement and steel producers, financial firms, logistics operators and power-related companies. Makers of heavy trucks and earth-moving equipment as well as automobiles should benefit from the upsurge. Demand for consumer products is also expected to perk up as the economy picks up steam, boosting jobs and incomes.

“Whilst the government’s improved focus on infrastructure creation should benefit stocks like Coal India, Container Corp of India and Power Grid Corp, superior targeting of subsidies through direct benefit transfer can boost bottom-of-the pyramid consumption,” analyst Ritika Mankar Mukherjee and Sumit Shekhar at Ambit Capital noted in a report.

After meeting experts connected with the decision-making process in New Delhi, they said Modi would likely focus on four main objectives — raise abysmally low tax-GDP ratio by widening the tax base through measures such as the Goods and Services Tax, incentivising states by using discretionary funds to force them to pursue reforms, plug leakages and boost savings by shifting subsidies to direct benefit transfers and increasing government spending on infrastructure creation.

According to the brokerage, road builders like Ashoka Buildcon, Sadbhav Engineering and MBL Infrastructure should be in the running for highway contracts, while Bharat Electronics Ltd, Power Grid, Alstom T&D and Techno Electric could benefit from higher government spending on defence, transmission and distribution of electricity and railways.

Rising incomes in the hinterlands should also help consumer goods makers such as Hindustan Unilever, Dabur and Colgate that get 40-50 per cent of their revenue from rural regions, it added.

Asset sales

After hitting a record high of 29,408.73 the Sensex closed at 29,278.84, gaining 4.1 per cent on the week and up 6.5 per cent since the end of 2014. The Nifty ended at 8,835.60, off an all-time high of 8,866.40, rising 3.8 per cent this week.

The rally should enable the government to partly salvage its stalled divestment programme. The authorities have invited bids from bankers to manage a 10 per cent stake sale in state-controlled iron ore miner NMDC Ltd that could raise more than $890 million — New Delhi has so far got slightly over $300 million, a minuscule of the $10 billion estimated for 2014-15 in the budget.

Plans are also under consideration to raise more than $1 billion through a 10 per cent sale in state refiner Indian Oil Corp. Other state companies that could see a stake sale before the financial year ends are hydropower producer NHPC Ltd and Dredging Corp.

However, stake sales of 10 per cent and 5 per cent respectively in Coal India and Oil and Natural Gas Corp, which could have collected about $6.3 billion, have hit roadblocks due to opposition from unions and the plunge in oil prices.

 

The writer is a journalist based in India.