Anand Rathi
We are entering 2018 with considerably better domestic macroeconomic situation than what prevailed during end of last year. At that time, the country was amidst the early phase of implementation of demonetisation and large uncertainties prevailed over the rollout of GST. Some of the renowned experts were talking about sharp rise in unemployed, marked contraction of output and large outburst of public disorder. Both equity and debt markets corrected and rupee depreciated against dollar during the closing months of 2016.
The year 2017, however, turned out to be a good year both for the economy and equity investors. Indian rupee too strengthened during 2017. The debt market underperformed. Yet, in periods of high investor risk appetite, this was not totally unexpected.
While GDP growth slowed down in the first-half of 2017, we are entering into 2018 with a rebound in growth rate. There are ample indications that the improvement would continue. After major softening until the middle of the year, retail inflation has hardened albeit modestly from historic lows. Both cyclically and structurally inflationary outlook in India remains largely benign.
Frontloading of expenditure, introduction of GST from the second quarter of the financial year and teething problems associated with the largest indirect tax reform in the country’s history led to more than expected widening of centre’s fiscal deficit in the first-half of the current financial year. The situation, however, has improved in recent months and the deficits at the state levels remain contained. Government remains committed to keep fiscal deficit within budgeted limits and plans to further fiscal consolidation. The performance of the economy during the closing months of 2017 and the outlook for 2018 look robust.
On the policy front, major initiatives during 2017 include recasting of indirect taxation framework, major push towards digital payment system, effective regulation of the real estate sector, improvements in the legal framework for loan recovery by banks and better targeting of welfare schemes.
These measures simultaneously aim at increased financial transparency, greater formalisation of the economy, targeted benefit programme for the weaker sections and stringent action against corruption. Far less visible the on ground changes to reduce lethargy, inefficiency, ambiguity and corruption in administration, which vitiates business environment. The structural measures are brightening India’s future outlook and global perception.
The recent upgrade of India’s sovereign rating after a 14 year gap testifies to this. The less visible ground-level changes and initiatives, on the other hand, have contributed crucially in India rising by 30 places and breaking into the top 100 countries in terms of ease of doing business.
We expect 2018 to witness continuation of both structural reforms as well as on-ground changes. In particular we expect further simplification of GST regime, simplification of direct taxation system, consolidation and enhanced targeting of welfare schemes (through removal of redundancy, fragmentation and ambiguities) and strengthening of the banking system (through recapitalisation of public sector banks, deepening of digital payments system and consolidation).
High cost of fund has been one of the key impediments to recovery of investment cycle. This, in turn, has held back stronger growth performance by the country. We expect direct measures to improve the transmission of past policy interest rate cut and also stronger advocacy for reduction of real policy rates.
Against this backdrop we remain optimistic about 10-15 percent return on bellwether equity indices during 2018. The return on mid- and small-cap equities is likely to be better. While we are aware of the discomfort about ‘rich’ equity valuations, we feel that with the likely pick up in earnings in 2018, part of this concern would get addressed.
Yet, the rising allocation of savings by Indian households into equities (mainly though MFs, PMS and also insurance) may keep the multiple higher than the last ten-year average for an extended period. While periodic corrections in the equity market are unavoidable and in fact healthy, we do not see high risk of sharp and prolonged correction in the equity market during 2018. At the sector level, infrastructure, cement, consumer goods and services and financial services are likely to outperform.
At the current level, we think that risk-rewards are favourable for longer dated securities. Government remaining on course to fiscal consolidation would avert over supply of fresh debt instruments. As growth in both deposits and advances accelerate, the banking sector liquidity may not improve much. The greater credit flow is likely to contain fresh corporate debt issuance and therefore the overall supply. We expect both inflation and policy rates would trend lower than consensus expectations in 2018. With these 8-10% running yield in dated securities look possible.
We feel that India’s capital account surplus would improve during 2018. Even the outlook for the non-trade part of current account looks encouraging. Barring an unexpected spike in crude oil prices from the current level, India’s overall balance of payment surplus is set to improve in 2018. We expect rupee in the 63-65 per dollar range.
Author is Anand Rathi, Chairman, Anand Rathi Financial Services Group
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