>ALPHA STRATEGY (BNP PARIBAS)

India: Monsoon risks, but domestic demand theme intact

SENSEX target 20,100 – Overweight

Market overview
India has been one of the top performers since the March low with the index rising 90% in USD terms. Much of the outperformance occurred in May, when a positive surprise on the elections result and a strong and stable mandate resulted in a country re-rating. After an inflow of nearly USD1b in one day (20 May), India has seen continuous strong inflows with nearly USD7.5b inflows since March lows. A lot of these flows have, however, been channeled into and
Primary/Secondary issuances (QIP’s) with almost USD4.5b raised in the domestic market and USD2b through ADR’s and GDR’s. There is another USD8-10b expected to be in the pipeline.

India’s fiscal deficit remains a concern with a 6.8% deficit at the centre (11.2% inclusive of states and off balance sheet items) on the back of increased government expenditure. However, a strong emphasis on infrastructure and strengthening of domestic demand through providing a consumption kicker has been the primary focus. While the government borrowing programme is expected to be large, this is not as bad as it seems as Indian corporates have been generating strong internal accruals and have reduced their capex plans. This, coupled with the QIP wave, has reduced concerns of crowding out of private investments as Indian corporates are well funded.

India, with their high levels of consumption of about 66% (Private: 56% of GDP, Public: 10% of GDP) is less affected by the fall in global demand and is a strong domestic demand story. The rural markets, which have been relatively untapped but have been given a lot of emphasis in the current budget, are another long-term growth driver for the economy. Consequently, we have seen sectors levered to the rural economy, like autos showing excellent quarterly numbers. Industrial production has also revived with a 16-month high of 7.8% y-y growth. These numbers have been on the back of increased demand and will result in a strong revival of private capex.

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