First FDI, economy inflection need 2-3 quarters

The gates are open, but the first foreign direct investment (FDI) in retail or aviation is not expected anytime before 2-3 quarters.

A top economist with a US investment bank, on the condition of anonymity, admitted on Saturday there’s a sea change in the milieu.

“Till before Friday, if you wanted to sound sensible in the market, you had to badmouth India. That was the level of psychological play involved. Today, we are all optimistic. However, for foreign investors to actually consider India as an investment avenue again, it would take at least six or more months,” this person said.

If all goes well, the inflection point for the economy is expected around then, is the refrain.

Echoing a similar sentiment, Gaurav Kapur, senior economist with RBS, said FDI is unlikely to pick up this fiscal.

“In the case of retail FDI, for instance, foreign investors would wait for the political backdrop to clear and stabilise before they look to commit to any large investments in India. These reforms are bound to run into opposition as key allies of the government are opposed to opening up of the retail sector. On the whole, the economy may already be bottoming out as is visible from the nascent signs of improvement in the investment activity,” he said.

The government on Friday allowed 51% FDI in multi-brand retail and 49% in aviation. And late Thursday evening, it raised the price of diesel by `5 per litre and put a cap on the use of cooking gas, thereby taking steps to reduce the fuel subsidy burden.

While these measures would help in the recovery process, it could take at least a couple of quarters for the economy to gather pace, experts said – if all goes well internally and externally, that is.

“These moves will have a huge positive impact on portfolio flows and improve fiscal consolidation. However, some less visible measures such as environmental clearances on large projects need to happen too,” said Abheek Barua, chief economist at HDFC Bank.

Also, with the government doing its share of policy measures, all eyes shift to the Reserve Bank of India’s (RBI’s) monetary policy announcement scheduled for today.

Industry patrons and economists alike are expecting the central bank to make at least a token 25 basis points (bps) reduction in either the cash reserve ratio or key policy rates.

Barua expects a 25 bps repo rate reduction today, and at least 25-50 bps worth of reduction in the remainder of the year.

However, Kapur from RBS believes the RBI may want to wait and watch the effects of FDI easing and the recent announcement of the third tranche of US quantitative easing, before making any major interest rate discounts.