>INDIA MACROSCOPE (CITI)

It's Getting Better, and Here’s Why

■ Macro is looking up: While some incremental data have yet to recover (exports, industrial production), we think India will do better on the back of (1) election results, (2) an improvement in the investment climate, both domestic and global and (3) signs of thawing credit markets. Our revised GDP numbers of 6.8% in FY10E and 7.8% in FY11E are investment-led and assume stability on the consumption front.

■ How and where will this growth come from? We think focus on the following will drive growth: (1) facilitating infrastructure development, (2) sticking to the Inclusive Growth Mantra, (3) improving the business environment – rationalize taxes, land, labor, (4) education and (5) opening up and out: global integration and financial liberalization.

■ Wild cards – can swing both ways: While we expect growth momentum to be stable and deeper, there are wild cards: (1) Agriculture – an El Niño threat is hanging large, but food stocks are a buffer. (2) Global capital markets – India needs capital; it is there today, but will it continue? (3) Oil and commodities – rising prices will hurt but lower prices will benefit. (4) Expectations are high, but promises stand a better chance of delivery due to the new monitoring
mechanisms in place.

■ Financial markets — Although the RBI is close to the end of its easing cycle, yields will likely stay in the 6% to 7% range due to (1) the possibility of one last cut and (2) the RBI’s continued participation in the borrowing program. The rupee, which has gained ~6% after the election results, is likely to strengthen further in the medium term due to (1) higher growth and (2) increased capital flows. However, in the immediate near term like most other emerging market currencies, the rupee is likely to oscillate between “risk aversion” and “return to risk.”

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