Why HSBC is upbeat on the Indian economy

Global brokerage HSBC on Monday said it is ‘overweight’ on India and the government's reform momentum is likely to drive positive news flow for the market that would help in sustaining the current market momentum.

It said sticky inflation level, however, remains a cause for ‘concern’.

Inflation has seen some moderation in the recent past, falling from double-digit figures in 2013 to 7.8 per cent year-on-year in August.

"We are overweight on India.

“We see several positives for the market, including structural reforms, supportive monetary policy, a decline in the cost of equity and a favourable corporate earnings outlook," HSBC said, adding that ‘this should help sustain the current market momentum’.

Meanwhile, several reform initiatives are lined up -- including foreign direct investment in railway infrastructure, defence and insurance; and energy sector reforms.

India is also considering 'big ticket' divestments in government-owned companies, which should help lower its budget deficit.

Though at this stage, elevated equity valuations are a concern, the consensus is currently expecting earnings growth to come in at 15.3 per cent for 2014 and 16 per cent for 2015.

On September 26, Standard & Poor's improved India's outlook to stable from negative saying the new political formation at the Centre has capacity to push reforms and put

the country back on high growth trajectory.

After taking over as Prime Minister in May, Modi has launched host of initiatives, including 'Make in India' campaign to ease business environment and fetch FDI.

Moreover, a decline in bond yields expected over the next two years could drive the cost of equity lower.

HSBC’s rates strategist Himanshu Malik expects that the high inflation premium priced into India rates could soon change as the central bank switches to a medium-term inflation target of 2-6 per cent.

This, in turn, could trigger a fall in 10-year Indian government bond yields to 7.5 per cent over the next 12 months and to 6-6.5 per cent within 2-3 years, he said.

"We believe this will be positive for Indian equities as it will lower the cost of equity for investors," the report said.