There are signs of private investment turnaround which is increasing capacity utilisation and declining cost of capital.
The Bharatiya Janata Party’s mammoth 303 seat win is a strong tailwind for equities and BNP Paribas expects the Sensex to touch 42,000, the banking group stated in its Asia Strategy Report.
Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas feels that the new government may find lawmaking easier as they have more seats in both the upper and lower houses of Parliament, compared to 2014.
"We believe expectations of further structural reforms could surge going forward," Raychaudhuri added. The Group is upbeat on financials, industrials and select consumer discretionary.
"We add to India in our Model Portfolio through the addition of HDFC Life Insurance," he said and further pointed out that unexpected escalation in the US-China trade war and India's election outcome has overturned investors' relative preferences between the Asian markets.
Challenges in front of government
The main challenge is that of job creation by kick-starting investments, Raychaudhuri said, adding that job creation is the ultimate way to durably boost consumption without damaging fiscal discipline.
Private consumption (57 percent of GDP) has slowed down over the past quarter driven by income uncertainty. On the positive side, there are signs of private investment turnaround which is increasing capacity utilisation and declining cost of capital. The decline in cost of capital, though slower than necessary, is supported by benign inflation and easing monetary policy.
"RBI has cut rates twice this year, and we believe should cut rates at least once more. However, policy rates have not adequately been transmitted to lending rates, and for that to happen more liquidity injection by the RBI seems warranted," a statement from BNP Paribas read.
According to BNP Paribas, the final challenge will be to re-accelerate Foreign Direct Investment (FDI).The Great Diwali Discount!
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