Top Five Factors Which Aided Market Rally As Modi Government Completes 100 Days

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NEW DELHI: As the Modi government completes 100 days, there are more reasons to cheer than get disappointed, but it’s a long way to go before we attain our full potential in terms of economic activity and attain higher GDP growth.
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The Indian markets witnessed their best period in the past 100 days after the NDA government took charge on 26 May 2014. However, the next 180-365 days will be crucial for the government and the economy.

“They (Modi government) have taken many steps to improve ease of doing business. Obviously, you cannot do everything and change everything within 100 days. But the trend is good,” said Adi Godrej, Chairman, Godrej Group.

“I am confident about India’s GDP growth accelerating going forward and this year itself the GDP growth should be much better than in the previous year,” he added.

Both the Sensex and the Nifty have managed to hit fresh record highs almost on a daily basis, supported by strong global liquidity and robust macro numbers.

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Tuesday marks the 100th day since Narendra Modi was sworn in as India’s 14th Prime Minister. The S&P BSE Sensex has rallied nearly 9 per cent since then.

GDP growth breaches above the trend line (%)



Here is a list of five factors which have aided the market rally in the past 100 days:

Business confidence is back

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One of the major factors which have aided a strong rally in the markets was the revival of confidence among investors.

“Business confidence is back, investor confidence is back and the capital markets are in a buoyant mood as one would expect them to be,” said Jayant Sinha, Spokesperson, BJP.

“We have seen that in terms of announcements and people are making fresh investments. So as far as confidence is concerned, that has come roaring back,” he added.

Prime Minister Narendra Modi has encouraged Japanese corporates to set up manufacturing bases in India. Addressing corporates at the Tokyo Stock Exchange, Modi said there is no place better than India for Japanese investors.

“They (Modi govt) have improved the sentiment in the country. They are taking steps to improve the ease of doing business in India,” said Adi Godrej, Chairman, Godrej Group.

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“The Prime Minister, in his speech to the Japanese businessmen, said that he will ensure the ease of doing business in India will improve and I suppose, he would not do anything that is solely for the Japanese. So overall, very good steps,” he added.

Revival seen in GDP growth

GDP data released last week also fuelled optimism in the markets that the economy might have bottomed out and is set to gain momentum from here on.

India’s economy expanded at its fastest pace in more than two years in the April-June quarter. India’s GDP grew at 5.7 per cent in the first quarter of 2014-15, exceeding expectations.

The macro-economic data is looking positive, the economic activity is expected to gather steam by 2015 and GDP growth rate may go near the 7 per cent mark in the next two years, say analysts.
 
“We had expected GDP growth to hit 5.1 per cent in the three months to June. However, this is still well short of potential GDP growth, which is currently around 6 per cent, but could easily lift towards 7 per cent with some modest economic reforms,” said Glenn Levine, Senior Economist, Moody’s Analytics.

Global brokerage firm Nomura, which sees nearly 15 per cent upside in the Sensex in the next one year, has revised its FY16 real GDP growth forecast to 6.8 per cent YoY vs. 6.5 per cent previously.

“We expect the economy to fire on all cylinders in 2015-16 with a pick-up in private consumption, investment and export demand," stated a Nomura report, authored by Sonal Varma and Aman Mohunta.

More FDI/FII flows to boost investment activity

Notwithstanding the fear of policy tightening in the advanced country, India’s attractiveness as an investment destination has improved on revived growth prospects (FY15 expected at 5.8% and FY16 at 6.5%) and a slew of measures initiated by the new stable government.

“We expect FY15 to witness a capital flow of USD80b. This would allow the RBI to raise the forex reserves to around USD350b by Mar15 from USD304b in Mar-14,” Motilal Oswal said in a report.

Back in August, the government approved raising FDI limit in the defence sector to 49 per cent and opened up the railway infrastructure segment for foreign direct investment.

“Over the past decade, gross FDI inflows into India have averaged less than 2 per cent of GDP and coincidentally also are just under 2 per cent of world FDI flows - about one-third of India’s share of world GDP,” Deutsche Bank said in a report.

“This could be expected to at least double as the government’s commitment to a more attractive stance towards foreign capital becomes understood,” added the report.

Fall in Fiscal Deficit, down 65% YOY

Thanks to a sharp compression in expenditure and a marginal pickup in revenues, the July fiscal deficit narrowed to Rs 27000 crore vs Rs 77800 crore in July'13. The improvement in fiscal trends partially allays fears following the sharp increase in the 1QFY15 fiscal deficit, Citigroup said in a report.

“This in line with our expectations and we expect the momentum to continue on the back of (1) economic recovery aiding tax collections, (2) fuel subsidies in check, and (3) concerted efforts on the divestment front - all of which bode well for India’s sovereign credit profile,” added the report.

While the cumulative deficit during Apr-July is currently at 61% of full year targets, the global investment bank expects the improved momentum seen in July to continue on the back of better revenues and containment in expenditure. This bodes well for the government meeting its 4.1% fiscal deficit target and India’s sovereign credit profile.
 
Analysts gung-ho on markets, see Sensex doubling in 3-4 years

Analysts at top brokerage firms see the markets and earnings doubling in the next 3-4 years, supported by reforms and economic revival. The macro-economic data is looking positive, and the economic activity is expected to gather steam by 2015. The GDP growth rate might hit the 7 per cent mark in the next two years, say analysts.

They expect that the next leg of the rally may be led by increase in earnings growth and with the economy expected to bounce back, the estimates might not be unreasonable.

“We continue to reinforce our message that earnings are set to double over the next 4 years to FY18 and the market returns could mirror earnings growth,” said Jyotivardhan Jaipuria, Research Analyst at DSP Merrill Lynch (India) and Anand Kumar of DSP Merrill Lynch.

“We continue to be bullish in the long term on the Indian market and believe that buying on dips is a particularly compelling strategy. Our bullishness is driven by the bottoming of the earnings cycle,” added Jaipuria.