Macro-economic Trend

Economy back on a strong growth curve: Ahead of market
expectations, the economy grew by a robust 7.9% in the September
quarter, propelled by increased Government spending and a surge
in the manufacturing sector. Consequently, the Government has
raised its expected GDP for FY10 up to 7.75%. Additionally, the
GDP growth is likely to revive and get close to 9% in the next couple
of years with further thrust coming from the export markets.

Monetary policies might be tightened: The RBI is likely to reverse
the easy monetary stance in the next monetary policy review.
Although a revision in the benchmark rate may be restricted to 25-50
bps, we believe it can be accompanied by a 50 bps increase in the
CRR rate to rein in the food price inflation, which has been the main
culprit in the tripling of the wholesale inflation rate from 1.34% in
October to 4.78% in November.

 
High fiscal deficit concerns: India’s fiscal deficit is likely to balloon
to more than 11% of its GDP in FY10 due to an increased stimulus
spending. However, the fiscal deficit may reduce to 9.5-10% in FY11
supported by an increased tax collection. Besides, we believe that
the gradual removal of the fiscal stimulus measures, proceeds from
the aggressive disinvestment program of public sector units, and the
possible selling of 3G telecom licenses will provide additional funds
to control the deficit and ensure sustainable growth.

Rupee on the path to appreciation: The Indian stock markets
have witnessed massive FII flows of over USD 17 bn in 2009 after a
strong recovery in the risk appetite of investors globally, which was
supported by an easy liquidity scenario. The FII flows may remain
strong in the near term as institutions chase high returns in
emerging economies such as India, and as RBI increases interest
rates ahead of developed nations, which may lead to a widening of
the interest rate deferential. As such, we expect the dollar inflows to
remain robust, which could lead to appreciation of rupee in the short
to medium term.

Q3’10 earnings likely to improve over Q2’10: We expect the
revenue growth for companies within Sensex to be at 21.5% yoy
and 9% qoq based on an improved demand scenario. Furthermore,
we expect the margins to improve by 110bps yoy and 80bps qoq,
driven by massive cost rationalization measures undertaken by the
industries in the last one year.