AllianceBernstein Asian sovereign strategist Anthony Chan said the main consideration for markets is whether India’s new Prime Minister Narendra Modi can deliver on policy implementation as priced.
Mr Chan believes India’s economic recovery will depend on a fall on oil prices, a narrower trade deficit, fiscal reform to reduce the financing burden on the central bank and commercial banks, and fiscal consolidation to bring about a structural reduction in inflation and the external deficit.
While India’s headline inflation has peaked, according to Mr Chan, the overall headline inflation trend remains high while core inflation has continued to hover at around eight per cent year on year for more than two years.
Mr Chan also noted that the Reserve Bank of India is likely to maintain a tightening bias on the policy rate.
“On that basis, we argue that the conditions of falling inflation and lower borrowing-cost structure are also absent,” he said.
In the past year, Mr Chan said the external deficit has worsened, with the budget shortfall upwards of five per cent of GDP instead of the 4.6 per cent targeted by the government.
“Fiscal consolidation will require the passage of regulations and reform bills to raise new taxes, reduce unnecessary public spending and allocate spending to areas that can kick-start investment, including attracting more foreign direct investment inflows,” he said.
“The question is how likely and how fast the implementation of such measures will be.”
Mr Chan said while there are high hopes for Modi’s proposed committee to implement policy changes, the reality is the Modi administration holds only 63 seats in the 250 seat upper house, despite a powerful 336 seat majority in the 543 lower house.
“This suggests that the passage of reform bills may not be as smooth as some in the market expect,” he said.
Given Alliance Bernstein’s cautious outlook on the fiscal front, Mr Chan also said the investment management firm sees “no reason to chase local currency bonds unless there is another relapse in growth”.
