Overseas analysts are now bullish on the Indian economy. An analysis by Bank of America and Merril Lynch has upgraded our FY10 capital inflow projections by $14 billion, on a mix of receding international risk aversion as well as domestic political risks.
This, in turn, should ease funding constraints, given India?s dependence on foreign capital inflows for long-term funding. But could appreciation damage recovery?
?We think not. The RBI will persist, in our view, with its policy preference for a relatively weak INR to support exports. At the same time, the need to block imported inflation from rising oil prices should prevent policy-driven depreciation,? said the report.
The institution feels that India may bottom out by end-09. ?This leads us to hike our growth forecast to 6.3% in FY10 (from 5.3%) and 7.3% in FY11 (from 7.1%). We have also grown more confident of our long-held twin view of BoP risks overdone/medium-term constructive INR outlook. This, in turn, has led us to push our FY10 BoP outlook up by US$14bn. Risks: monsoon, US$100+/bbl oil.?
At the heart of such an upgrade is a likely fiscal stimulus of 0.5-1% of GDP in the July budget. The convincing re-election of the Congress-led UPA, after all, has opened the door for 0.5% of GDP of PSU divestment.
?Our estimates also suggest that the government can borrow an additional Rs 500bn/$10bn in case the RBI steps in with our expected OMO purchases of Rs1200bn/$25bn,?? said the report .
Robert Prior-Wandesforde, senior Asian economist, said over recent years, India?s manufacturing PMI has led turning points in exports and it is encouraging to see the index bounce higher sharply to 55.7 in May, exceeding that of China?s, which slipped slightly to 53.1.