>ASIA ECONOMICS FLASH (GOLDMAN SACHS)

India: Voter stimulus to markets

■ The Congress-led UPA alliance unexpectedly won a big victory in the Parliamentary elections, ensuring that they will form the next government, which will not include the Left or other large regional parties.

■ We think the decisive result is a big positive for markets as it will lead to a stable government, removes months of uncertainty, and will allow the Congress the space to pursue reforms. We think pension, insurance, banking reforms and disinvestment may be back on the agenda.

■ The election’s positive impact on business confidence is the final tenor in the chorus of evidence arguing for a pickup in activity and investment demand in 2HFY10. Recent evidence from the PMI and demand indicators, a large easing of financial conditions, historical peak-to-trough declines, and a huge pent-up demand for infrastructure and affordable housing sing to the same tune.

■ These election results may help India “decouple” further from the global economy by giving a fillip to domestic demand, and there are now upside risks to our GDP growth forecast of 5.8% for FY10.

■ We think the equity market will react positively to the result, with sectors that will benefit including cyclical sectors as the investment cycle turns, and those that play on rural demand—a continuing priority for the UPA. We think that the positive impact on capital inflows will help buoy the INR and we reiterate our 3, 6 and 12-month USD/INR targets of 49.2, 47.3, and 46.0.


To see full report: ASIA ECONOMICS FLASH