Indian markets bounced back from lows of January …

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The Indian equity markets have bounced back from their lows seen in January (due to QE tapering and EM volatility) to end in the green for the quarter. This could be attributed to the improving macro economic data in India coupled with a stabilizing currency, fall in current account deficit (CAD).

Foreign institutional investors have invested around USD 3.5 billion in Indian equities so far this year. The Indian rupee, which depreciated sharply last year has seen a smart recovery and is up around 3% versus the US dollar this quarter and is the best performing EM currency since the lows seen in August 2013.

Inflation has also moderated over the past couple of months (due to falling vegetable and food prices) and is down around 300 bps from its peak seen in November 2013. This trend, if sustained, could lead to a likely reduction in interest rates, later this year, Strongly believe that the Indian economy is on the cusp of a strong growth uptrend that could herald 6-7% GDP growth per annum over the next 5-10 years. This will contribute to robust growth in corporate earnings and underpin strong performance of Indian equities.

Robust consumption, driven by rural wage growth; infrastructure, both private and government and outsourcing, led by automobiles and pharmaceutical exports are key themes that will drive India’s growth story for the next decade. A weaker growth outlook coupled with a rising current account deficit (CAD) had led to weakness in the rupee. However, with the Q3 FY14 CAD coming at just 0.9% of GDP (versus 4.9% in Q1), the figure for FY14 could be much below 2.0% (versus the 4.8% registered last fiscal).

Though consumer price inflation continues to stay elevated (March CPI at 8.3%), it has moderated in the recent past. Disruptions caused by the recent bad weather conditions in Madhya Pradesh and Maharashtra could have some negative impact on vegetable and food prices.

On the policy front, some significant decisions announced over the last several months include increase in the subsidized price of diesel and opening up of foreign direct investment limit in various sectors like telecom and defense.

Q3 FY2014 GDP at 4.7%, was marginally below estimates mainly on account of a lower than expected growth in agriculture. Industry output was lowest in 3 years while services segment accelerated due to strong growth in financial services. We believe that GDP growth might bottom out in the March quarter and that growth will revive in the second half of FY2015.

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