Improving domestic macros, an earnings growth revival and the government's reforms push are considered key positives that will support the market momentum even though a recovery in investment cycle may not be imminent. The optimism generated by the formation of a stable government at the Centre has sparked a bull run, with the Sensex yielding close to 26% in Samvat 2070, the highest in the last six. This, despite a slowdown in FII inflows $17 billion worth of shares were bought, about 25% lower than $22.2 billion in samvat 2069.
Market observers cite a correction in global commodity prices as a major catalyst that would lead to a three-fold benefit in terms of its impact on current account deficit, fiscal deficit and the inflation trajectory. According to Bank of America Merrill Lynch, while there is a strong correlation of 93% between the Indian stock market and crude over the long term, at a tipping point this relationship turns negative in case of a steep fall in crude prices, which is clearly a positive for the Indian economy.
Global crude oil prices, as represented by brent crude, have plunged by a fourth since the June peak of $114.8 per barrel and currently trade at $86.6. For fiscal 2014-15 so far, the average price of brent stands at $104.6 against $107.6 in FY14.
It is estimated that a one-dollar drop in crude prices takes off $1-1.2 billion of pressure from CAD and also has an indirect impact on fiscal deficit through a decline in the government's subsidy bill. According to BofA ML, every $10-per-barrel decline in crude oil price lowers CAD by 0.4% of the GDP and fiscal deficit by 0.1%.
Inflation trends have also moderated, with the benchmark CPI and WPI falling to multi-year lows in September. This, in turn, has raised hopes of an earlier-than-expected interest rate cut by the RBI.
Dinesh Thakkar, CMD, Angel broking, says a combination of factors, including lower commodity prices, falling inflation, hopes of a cut in interest rate and improving earnings growth of corporate India, would continue to supporting investors' faith in the market.
Although the market may face a fair amount of volatility going ahead due to global factors, I see the Indian market generating 35-40% compounded returns over the next two years, he said. Experts feel the government's policy push would further accelerate a recent uptick in the economic activity with the Q1 GDP numbers for FY15 reporting a higher-than-expected growth of 5.7%.
However, for the growth trajectory to continue to improve, key policy changes for reviving the investment cycle are essential. Gopal Agarwal, CIO of Mira Asset Mutual Fund, says mining reforms and those to step up infrastructure spending are key requirements.
Kotak Institutional Equities says recent measures in the energy sector and labour reforms have allayed some of the Street's concerns.
India has a good mix of an improving top-down macro-economic situation and excellent bottom-up fundamentals and the recent pick-up in reforms will keep valuations and investor interest at elevated levels, said the brokerage.