What the trends foretell

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SummaryThe Indian stock markets were among the best performing in the world in 2012 with a complete roller coaster ride.

Market could do well in 2013

Vikas Khemani

The Indian stock markets were among the best performing in the world in 2012 with a complete roller coaster ride. Beginning the year with a lot of pessimism, pre-budget expectations attracted lots of flows and a market rally, which eventually fizzled out due to onerous issues like GAAR and poor fiscal discipline. The economy started dwindling, with GDP growth slowing down to 5.1%, current account deficit (CAD) rising to in the high 3% region, rupee touching all time low, inflation refusing to come down. The government almost appeared to have paralyses and country rating downgrades was becoming imminent threat. With the changes in the government and its resolve to get the growth back, market hopes have surfaced again of an economic revival. This has again led to a market rally and fund flows.

The year has been one the best performing for the Indian market with approximately 30% return and also one of the best years in terms of FII flows ($20 bn). One the biggest reasons for such large flows and sudden change in the sentiment is the structural story of India. Most other emerging markets (EM) are struggling with many structural problems, China has a problem of growth and political transition, Brazil and Russia are largely commodity driven economies. Developed markets are dealing with their own problems. India is the only market of this size, other than Indonesia, which has a structural story in place. Hence, India was one of the largest beneficiary of EM allocation in 2012.

With the change of guard at the finance ministry, things began to stabilise. Over the last few months, government has initiated a slew of politically difficult measures both to turn around the business and market sentiments as well as helping the real economy. These included a hike in fuel prices to contain fiscal slippages, liberalising capital account to improve the BoP situation, making progress on SEB debt restructuring and coal prices pooling, moving to hike the FDI limit in multi-brand retail and very recently introducing direct cash transfers for government welfare schemes as well as passing of the Banking Bill in the Lok Sabha.

This approach of the government, which seems to have decided to get the economy back on track before federal election, sets the tone for 2013. Global environment appears to be by and large stable with an easy monetary policy stance. Key drivers

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