India’s foreign direct investment inflows remain robust, which could be key driver for the country’s economic growth and productivity increase over the medium term, notes Goldman Sachs.
Tushar Poddar of Goldman Sachs Research in his August 17, 2015 research note titled: “India Views: Better macro data” revised his 3,6 and 12 month forecasts for the INR to 64.5, 65, and 65, after the impact of the surprise CNY depreciation last week.
India holds strong FDI pipeline
Poddar points out that the recent announcement by a large Taiwanese manufacturer to invest $5 billion in Maharashtra is significant as this is precisely the kind of FDI that India needs to move labor from low productivity agriculture to higher productive and labor-intensive manufacturing. He notes the recent announcements indicate the FDI pipeline remains strong. The analyst notes inflows from the increase in FDI limits in insurance are also coming through with a large global insurance company announcing an increase in its stake with a local partner over the weekend.
Gleaning data from recent economic numbers, Poddar points out that FDI flows into India increased in 2014 to $41 billion, and FDI inflows in the first half of 2015 were $26 billion.
Tracking the recent activity data, Poddar notes data is coming in a tad better from earlier low levels. Goldman Sachs’ Current Activity Indicator for 2Q highlighted an improvement to 5.1% qoq annualized from the surprisingly weak 4.2% clocked in Q1. Poddar points out that greater government spending and slightly better external demand are behind the slight improvement in demand conditions:
Though July headline CPI inflation came down significantly in yoy terms, the analyst advises caution as the month-on-month decline was not as large.
RBI could remain on hold through FY16
Turning his attention to the central bank’s rate action, Poddar sounds caution despite the weak inflation print has led to the market pricing in more rate cuts. He argues that the probability of a further rate cut has risen, though it’s still not his base case for several reasons. For instance, he notes the RBI is cognizant of the long lags in the transmission of monetary policy, and hence rate cuts now would only be transmitted by late 2016. Besides, he reckons the RBI would be wary of the impending Fed hike and its impact on capital flows.
Following the recent CNY depreciation, Poddar’s 12 month forecasts of the INR are now 2.5% weaker against the USD relative to his earlier forecasts. However, the analyst points out that still his forecasts imply a significant trade-weighted appreciation of the INR and are meaningfully below the forwards.
Pointing to the policy action, Poddar notes there has been no progress on the legislative agenda of the government as the monsoon session of Parliament was largely blocked by the opposition, not allowing passing a Constitutional Amendment for the GST or discussing the land bill. However, he draws attention to some progress made on bank reforms wherein the government would make a capital infusion of about $4 billion in FY16 and FY 17, and a further $1.6 billion over the next 2 years. He argues that these announcements could lead to a more robust public banking sector capable of supporting higher economic growth.
The post India’s FDI Trends Looking Positive: Goldman Sachs appeared first on ValueWalk.
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