The Reforms momentum by Central Government continues despite the massive 2G Spectrum and CWG Scam, growth momentum has weakened. The sticky inflation – particularly food prices – is crimping the RBI’s scope to support growth by easing policy. Withdrawal of support by the DMK, a key ally of the ruling DMK coalition, has raised the spectre of political uncertainty and early national elections.
Today the Finance Panel in the Parliament of India has directed the RBI not to Issue any new banking license as their is scope for massive corruption. With the Congress Government not having majority in the Parliament, RBI is likely to maintain status-quo on this issue. What does this mean ? This means that Parliamentarians representing Indians no more have faith in the Government to support its reforms process as Congress finds a way to favor some group by means of massive corruption and possibly laundering money offshore.
We expect the economic headwinds to continue to weigh on the earnings of Indian Industries. Sectors depending on the domestic economic cycle – particularly, autos, financials and capital goods – will see some earnings downgrades as they didn’t get any major push from the Government of India.
There is an undue pessimism on the street and a common view now is that the Indian Currency will drive a crisis, and that the economy is headed for a meltdown. We believe a crisis is unlikely: this is an important difference of opinion, but we do believe cooling off of the Indian Economy but no meltdown.