While the GDP growth for the March quarter has been a pleasant relief for investors, the question that still lurks in the mind would be, is it sustainable?
The good news in the Q4 GDP report is the strength in private consumption at 14 per cent growth in nominal terms, despite the drought and the revival in the investment cycle with 25 per cent growth in nominal terms.
I think this momentum will continue into 2010-11, and barring unforeseen circumstances, one can expect 2010-11 GDP growth of 8.5 per cent.
Private consumption and the revival in the investment cycle will be bigger contributors to growth in 2010-11, more than offsetting the deceleration in government expenditure - monsoon being the big wild card. On the flip side, however, such strong growth numbers would imply continued policy tightening from the RBI, in response to the inflationary pressures.
The sudden spike in the price of risk in early May has resulted in huge swings in currencies, commodities, equities and bond prices, with some key commodities declining 10-25 per cent month-on-month. However, the fall in commodity prices will have beneficial impact on inflation and the current account.
The worries over fiscal deficit have also abated with the highly successful 3G and BWA auctions. The extra revenue from these auctions will lower the government's fiscal deficit (and borrowings) by about one percentage point, easing the pressure on long-bond yields. This, coupled with prospects of normal monsoon and consequent easing of inflation will ease the upward pressure on interest rates - the RBI will tighten rates gradually (about 25 basis point hikes).
While the European Union is an important market for India's merchandise exports (with a share of 15-20 per cent, though it is declining), the share of the severely affected PIIGS countries is just 4 per cent.
The share of India's services exports to these countries is even lower, in my view. Thus, I do not see a negative impact of the current European crisis unless it spreads to bigger European countries like the UK and Germany, among others.
Market valuations are at present trading broadly in-line with or a shade lower than the historic average, leaving room for appreciation for long-term investors. With macro fundamentals improving significantly and the prospects for over 20 per cent earnings CAGR over the next two years, equity markets look attractive for investors with patience to ride out the intermittent bouts of volatility.
The author is Chairman, IIFL - India Infoline group
