Investors remain worried about shifting macro risks in India, despite the majority of actual economic outcomes being better than expectations. Indian policymakers have done a good job of cushioning the economy from the global credit crisis and positioning it for a strong rebound.
Investors continue to generally misinterpret the broader policy framework and the likely course of policy moves in India. The RBI has been measured in its approach, despite expectations of earlier and more aggressive moves. Also, the recent budget for FY11 has positively surprised investors by the much-needed focus on fiscal consolidation, and a gradual reversal of stimulus measures.
The single biggest issue that is under-appreciated is the pro-growth approach of the government. Few fully appreciate that the government is keen for the investment cycle to pick up, and hence will ensure that risk of crowding out of
private investment is minimised.
Divestment and some initial steps on fertilizer reform have already been initiated. Some steps on fuel subsidy are likely once food inflation comes off appreciably. With no meaningful state elections this year, the current government will likely undertake baby steps on some long overdue reforms.