India: Great expectations versus ground realities – ANZ

ANZ analysts suggest that Indian risk assets are not at stratospheric levels but recent valuations, particularly for equities and the rupee, remain out of sync with moribund growth.

Key Quotes

“Discounting future cash flows, equity prices are admittedly forward-looking. However, the problem is that India's growth in the foreseeable future is unlikely to rise to its potential level of around 7%.”

“Recent tax cuts, though undisputedly important in placing India in a competitive tax jurisdiction, will prove insufficient when growth is being impeded by weak aggregate demand and a fractured financial system. The absence of accompanying structural reforms in the land and labour markets also cast doubt on whether the pay-off from tax reforms is adequate to catapult India into a global manufacturing hub.”

“Rather, we expect more of the same — a continuation of negative surprises to consensus growth estimates, most likely through the first half of 2020.”

“An attendant de-rating of Indian equities via diminished foreign portfolio flows can pressure the INR, but only if the basic balance of payments position deteriorates. At the same time, a fiscal slippage will add to the risk premia on Indian assets.”