Boston, MA -- (ReleaseWire) -- 05/26/2014 -- There remains a high degree of uncertainty over the end results, due to increased factors driving a fragmentation of the vote, in India's lower house elections being from April 7 to May 12. We maintain our expectations for the opposition (and more market-friendly) Bharatiya Janata Party (BJP) to lead the next coalition government. Fuelled by the disappointment rule of the United Progressive Alliance (UPA)'s second term in office, this had initially had significant realisation potential. However, since the impressive vote win in the state of Delhi, the BJP now faces threats from both its old adversaries such as the Indian National Congress, as well as new competition from up and coming parties such as the Aam Adani Party (AAP).
India's painful process of external rebalancing is almost complete, and this will set the stage for an economic growth revival in FY2014/15 (April-March). The pace of recovery will depend on the timing of monetary easing, as well as a decisive and business-friendly outcome to the 2014 general elections. We are optimistic on both these fronts and expect investment activity to pick up materially over the course of the year. Our constructive outlook is reflected in our 2014 real GDP growth forecast of 5.6%, which sits above consensus expectations of 5.4%.
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Although headline inflation has eased somewhat in India, it remains at elevated levels, amongst the highest in the region. Acute food price pressures, as supplies often constrained by logistical inefficiencies and prices, further boosted by minimum support levels dictated by the government, lie at the heart of the problem. Expansionary government policy further exacerbates these pressures. Short of a major reduction in subsidies and minimum support prices for agricultural goods, both of which are unlikely even post-election, there is a risk that the Reserve Bank of India (RBI) may be forced to keep interest rates tight for longer in FY2014/15.
The Indian rupee remains one of our favourite currencies in the region currently. We expect the unit to average INR58.00/USD in 2014, roughly 6.3% above the current spot of INR61.90/USD, as external risks recede and investors turn their attention to the significant value on offer. Bolstering our case is India's increasingly constructive macroeconomic outlook, which should see the economy embark on a growth recovery in the second half of the calendar year.
Major Forecast Changes
We have pushed back our interest rate expectations for India. We now expect the RBI to remain on hold for the rest of FY2013/14, before delivering monetary easing worth 25bps in the second half of the following fiscal year.
Owing to the possibility of that the RBI will roll back its current restrictions on gold imports, we have pared back our expectations for the pace at which India narrows its current account deficit.
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