Whereas the global economic and political context remains challenging, with every challenge comes an opportunity and every opportunity that is seized is a potential “game changer”. The sharp drop in commodity prices is an opportunity for India to change its subsidy mechanism and step up infrastructure execution.
Internationally, the US Fed continues to be optimistic on the US economy and advocating a cautious tightening of the monetary policy. At the same time, investors are keenly observing the economic situation in Greece and how the Greek debt repayment takes place.
The Union Budget underscored the Government’s reform agenda. As part of the Government’s efforts of boosting public investment to kick-start the economy, this budget provided Rs. 70,000 crore extra capital expenditure spending partly through the budget and partly through central PSUs. . Roads and railways were the thrust areas and should benefit from the increased outlay. Steps to rationalize the corporate tax rates and renewed commitment towards timely implementation of GST and DBT (direct benefit transfer) are other initiatives. Fiscal prudence on part of central government as well as the declining inflation data gave the RBI room to cut rates and it responded with a 25bp rate cut shortly after the budget. The commitment to maintain fiscal prudence while boosting public spending should also comfort external rating agencies. We believe that interest rates will move down gradually as inflationary pressures are muted - CPI inflation for March ticked down to 5.17%. Lower rates along with Government funding for infrastructure and economic reforms will help boost the economy.
India remains well positioned in the current global macro construct. Soft commodity prices and lower domestic interest rates provide a favorable background. While near term corporate earnings can remain muted given the slower than expected economic revival, medium term prospects remain promising and thus we expect equity markets to generate good returns over the medium-term.
CIO, Max Life Insurance.