Domestic demand continues to accelerate as evidenced by a slew of macro and micro indicators from the PMI, credit growth to auto
sales and infrastructure build-out. With demand remaining strong, we think core inflation will likely remain elevated through
FY11, and maintain our above-consensus inflation forecast of 7.5%. This would prompt further action by the Reserve Bank of India to
withdraw accommodation.
The current account deficit is set to widen due to strong domestic and weak external demand, and we increase our deficit projection to 3% of GDP for FY11 from 2.5% earlier.
The macro fundamentals remains favourable for corporate earnings, but valuations are rich, and therefore, our strategists maintain a
market weight on the Indian equity market.