Riding the hope rally as markets run up nearly 30%

Since February this year, stock markets have been on an upsurge on hope that the new government to do wonders to put the economy on fast-track.

That's a tall order but the markets would be content even with a 6% growth this fiscal.

"The perception on the ease of doing business and quick approvals has certainly undergone a sea change," says Deepak Parekh, chairman, HDFC.

There is no doubt of a revival of new projects in steel and infrastructure sectors, he said.

From 6000.90 on February 2, the CNX Nifty has made an upmove of nearly 30% at Friday's close of 7790.45, and India continues to attract global investors with many more in the pipeline waiting to join the party, say market participants. To date, foreign institutional investors (FIIs) have invested close to $11 billion since February.

In the bargain, many companies such as Reliance Communications, GMR, YES Bank, Ashok Leyland, SKS Microfinance, to name a few, have tapped the overseas markets through the qualified institutional placement (QIP) route. As of date since April, funds raised by corporates through QIP route either in equities or debt have surpassed Rs 16,400 crore.

"Among emerging markets, not only India has become investors' (FIIs) favourite, the credibility of Indian papers have also got a significant boost," said Dilip Bhat, joint managing director at Prabhudas Liladhar.

Raising money overseas has also reduced the stress on the financial system, especially infrastructure funding where banks were reducing exposure to such accounts in view of bulging non-performing assets of government banks totalling Rs 1.3 lakh crore during fiscal 2014. Perception has changed but the ground reality hasn't. The government has enough to do to address the dismal 4.6% growth under the earlier UPA government and the massive current account deficit of $32.4 billion as of fiscal 2014.

Inflation is another worry before bringing down interest rates for both the government and the Reserve Bank of India. The Urjit Patel recommendation in January had suggested a 4% consumer price index (CPI) over the next two years and 8% in the ensuing12-month period. With CPI currently inflation at 7.31% from the April level of 8.28%, it appears, the slide is moving in line with the recommendations. The continuity in trend could be expected if the government succeeds in addressing supply side constraints. The efforts are on and the NDA's maiden union budget of July 10 shows the seriousness of the government in addressing growth and inflation.

"It is surprising to note the Lok Sabha sessions go on till 10 pm," said Arun Kejriwal of Kejriwal Research.

"There are huge expectations from the Modi government, even though it could take as much as six to12 months for the economy to show signs of a pick up," said Deepak Parekh.
With the markets having rallied this far, it remains to be seen whether it would continue the upward climb.

"All hopes have already been discounted. It is now time for credible action which alone can sustain the buoyancy," said U R Bhat, managing director at Dalton (India) Capital Advisors.

There are a few key issues on the tax front that needs to be addressed by the government. The government's silence on retrospective tax clarity and the general anti-avoidance rules (Gaar) that give sweeping powers to tax authorities to unwind transactions and make them taxable are negatives that could spoil the growth party.

"Though there has been some clarity on treating income from investments in shares by foreign investors as capital gains (not business income), the government has remained completely silent on Gaar and retrospective taxation," said Pranay Bhatia, partner at BDO India LLP.

Most agree that India's image across financial markets has immensely undergone a facelift for good.

"The focus has shifted from China to India. But moderation doesn't work. One needs to go all out to attract foreign direct investments and not get swayed by FII investments which can disappear the way they enter," said Ramesh Vaidyanathan of Advaya Legal, a corporate law firm.