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India Readies for More Dovish Fed and Bull Rally

India has been firing on all cylinders to lay the groundwork for invigorated, tangible domestic growth and to shore up its diplomatic currency globally.

Under Modi’s leadership over the past two years, India has (i) implemented a nationwide social security system and comprehensive bankruptcy code, (ii) overhauled a decades-old tax treaty network along the Mauritius-India and Singapore-India corridors, (iii) digitized its incorporation and e-governance platforms and (iv) streamlined approvals in more consolidated and transparent fashion.

Abroad, it has been aggressively negotiating alliances across Asia, and globally, to position itself as a national partner for manufacturing, consumption and investment. Its most recent diplomatic ambitions have included lobbying for recognition as a global strategic and defence partner of the US, and a push for inclusion in the NSG.

The progress has been demonstrable for investors. Private equity saw more exits, venture capital deals boomed, and distress players should soon reap the rewards of the government’s focus on cleaning up the balance sheets of public sector banks.

Indian equities, however, haven’t yet reflected the tailwinds of these reforms, due to global macro conditions triggered by the U.S. tapering of its decade-long quantitative easing policy.

Inflows into Indian equities

But, a few explosive kickers now lie in store for Indian equities:

One, the much anticipated uniform goods and services tax (GST) is now widely surmised to pass in the upper house of Parliament, where it has been blocked by opposition parties to date. Once passed, it should normalize national supply chains, payment processing and revenue collection on a scale never before experienced across India’s 29 states.

Second, RBI Governor Raghuram Rajan’s recent announcement that he will not seek a renewed term as chief of the Reserve Bank of India confirms India’s intention to appoint a more dovish Fed head who we can expect will pare back interest rates, a move that many domestic voices are pushing for in order to further propel India into the limelight as the world’s fastest growing economy.

Third, this week, the Modi administration finally opened up FDI in sectors such as defense and pharma to majority foreign ownership, and relaxed local sourcing rules for single brand retail. These changes should jumpstart a backlog of stalled deals into action and further stimulate increased foreign direct investment into India.

FDI into India

A big importer of energy, India is wise to move quickly to ride its favorable momentum while the global price of crude oil remains low, as a continued rise in oil prices or spike in domestic inflation could slow its sprint. Those negative factors notwithstanding, one can expect corporate earnings in India to get a big boost in the medium term assuming these kickers pan out as intended.

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