Given the bullishness in the Indian market, you should participate in the equity and bond rally as improving fundamentals despite global economic challenges drives the rally. The risk is that the Indian economy falters due to global growth issues but the fact that central bank liquidity is sloshing in the system, flows will continue to stay robust and that should mitigate risks to a certain extent.
Sensex and Nifty at record highs of 27,800 and 8300 respectively and ten year government bond yields at levels of 8.28% as of 31st October 2014 is standing out as the best performing market globally over the last one year. Sensex and Nifty have risen by over 30% while ten year bond yield is down 40bps over the last one year. The INR in all this bullishness has stayed flat at around Rs 61.30 levels against the USD.
FIIs have pumped in USD 10 billion into equities and USD 15 billion into bonds since April 2014, driving the domestic markets higher. India looks to be standing out in a world where there is not much to be optimistic about and this is driving flows. Apart from the US, which saw third quarter 2014 GDP at 3.5% levels and second quarter GDP at 4.6% levels, the world growth forecast is not optimistic. Read our analysis on “Low growth and lack of inflation risks on your portfolio” for world global growth forecasts.
India is being seen as an economy that is doing better even as other economies are floundering. Read our “November 2014 Monthly Market Analysis” for relative market performance comparisons. India benefits from falling crude oil prices that are down over 20% over the last one year as it imports 80% of its oil requirements. The Modi government has taken steps to curb subsidies by deregulating fuel prices and is sticking to a fiscal deficit target of 4.1% of GDP for this fiscal from 4.5% of GDP seen in the last fiscal.
Current Account Deficit is estimated at around levels of 2% of GDP against levels of 1.7% of GDP seen last year. Robust capital flows will strengthen the Balance of Payment (BOP) position of the country. CPI inflation is down from over 9.5% levels to levels of 6.46% since September 2013.
Given that two large economies in the World, Eurozone and Japan are facing a rough time, their respective central banks are infusing liquidity to pump prime the economies. Bank of Japan, today, unexpectedly increased monetary stimulus by 25% to levels of USD 724 billion as inflation at 1% is running below target levels of 2%. ECB is buying covered bonds and will start purchasing asset backed securities to add over USD 1 trillion into the system including Long Term Refinance Operations (LTRO) given that Eurozone inflation at 0.3% is well below target levels of 2%.
The Fed in the meanwhile ended its QE3 this month and this has led to the USD strengthening to multi year highs against majors. The INR staying flat is due to broad USD strength but going forward the currency will strengthen on the back of strong portfolio flows and improving BOP position.