Investor sentiment towards the Indian economy is improving but markets are now looking at the passage of key reform bills like the Goods and Services Tax (GST) to act as "new catalysts", says a Citigroup report.
Expectations on structural reforms however remain low and "could be a positive catalyst if GST gets passed", it said.
According to the global financial services major, both equity and fixed income (FI) investors are portraying a constructive outlook for India, but are waiting for the next 'catalyst' for fresh inflows.
"Positioning on India still remains heavy and relative valuations do not appear to be cheap. This is possibly leading to a lack of substantial fresh inflows as the markets await new catalysts," Citigroup said in a research note.
The BJP-led NDA government assumed office on May 26, 2014 with a thumping majority in Lok Sabha, but some key bills, including the one on GST, have been stuck in Rajya Sabha due to opposition from some other parties, mainly Congress.
As per the report, foreign equity as well as fixed income investors believe that the Indian economy is relatively attractive than other emerging market economies as it provides better macro stability. Some investors were also enthusiastic about the prospects of a cyclical recovery.
Though investors are on a cautious mode but with better monsoon forecasts, rural consumption is likely to revive.
Moreover, urban consumption is expected to get a boost post the 7th Pay Commission implementation.
"There was some skepticism that without substantial growth in jobs and wages, consumption may not be sustained only by strong retail credit growth," the report noted.
Investors held divergence views on inflation and rate cut and while one more 25 bps rate cut seems to be priced in, expectations on future rate cuts varied widely.
"Mixed views on inflation and rates as investors wait and watch for the monsoon outcome," the report said.
Earlier in April, RBI reduced its policy rate by 0.25 percent to 6.5 percent. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5 percent cumulatively since January 2015.
However, the industry still wants further rate cuts from RBI to boost investment.
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