The disconnect between corporate commentary and investors’ outlook is perplexing. Managements continue to be cautious on the home market—Larsen and Toubro said on Friday the environment was yet to get better, specifically highlighting there was little investment by the private sector. The Bajaj Auto numbers reflected how the company had lost market share in the executive segment because customers were downtrading; the CEO himself was circumspect on the prospects in the home market in the near term. If corporate earnings are in line with estimates, much of it is because of the depreciating rupee—TCS, Reliance and Bajaj Auto have all gained from a weaker currency. Yet foreign funds continue to shop for Indian stocks; in September they spent close to $2 billion while in October the tab is already $1.5 billion. And on Friday, the sensex rallied all the way to a near three-year high of 20882.
To be sure the macroeconomic situation has improved since mid-July. To begin with, the rupee has recovered to levels of 61-62 leaving corporate balance sheets that much less damaged. At the same time, the weaker rupee has boosted exports—textile exports are up 14% y-o-y for April-August. Indeed, with the trade deficit for Q2FY14 coming in at just $30 billion compared with $50.5 billion in Q1FY14, the current account deficit for the year now looks a lot smaller at around $50-55 billion compared to $88 billion in FY13. In addition, a good kharif harvest should not just keep food prices in check but also leave rural incomes robust. There’s also a good chance the auctions for spectrum in January will go off well. To top it all, it now looks like the Fed will not taper for a few more months which means FII funds could continue to flow. Indeed, it will have to be liquidity that keeps the markets afloat because, all said and done, investments aren’t picking up as reflected in the loan growth numbers of banks—Axis Bank has tempered its loan growth guidance for the year to just 15%. Also, given how highly-leveraged infrastructure companies are, it could be a while before they’re able to shed the debt through asset sales and re-invest. More immediately, since government must dramatically rein in expenditure to meet the fiscal deficit target of 4.8% of GDP, any stimulus from that front will now be reduced sharply. If investors are still buying the India story,