The Indian economy is gaining strength owing to improvement in the macros and the recent cut in interest rates. One interesting observation is that bond yields have fallen to nearly a decade low, excluding the extreme volatility seen during the financial crisis of 2008/09.
There is high probability of low yields sustaining due to cooling inflation. Internally, food inflation will ease further following high food grain and vegetable production. Externally, crude oil prices are expected to fall further due to excess supply and low demand. This is already reflected in September 2016 CPI inflation, which stood at 4.31 per cent - close to the RBI's long-term target of 4 per cent. The newly constituted Monetary Policy Committee is entrusted with maintaining price stability and managing inflation, while keeping in mind the objective of growth. This means the panel is likely to cut rates further if inflation continues to ease. The return of low interest rate regime is a tailwind at the current juncture for the growth of the Indian economy.
During the previous low yield regime, India's GDP grew 8-9 per cent, leading to a strong pick-up in Sensex earnings and a multi-year bull run in the stock market. The Sensex appreciated from 3,377 to over 20,000 in the next five years. At the moment, the Indian economy has gathered enough momentum for growth. In line with the earlier instance of low yield, this low yield regime is expected to show strong growth in the economy and equity markets.
With a stable government and overall decline in twin deficits, our macros have also shown strong improvement. This is very important to bring the much required foreign direct investments. Our annual FDI inflows have shown decent rise in the past three years. Last fiscal, India attracted $5 billion worth of FDI and this year we expect to see record numbers. This is an indication of strong backing by foreign investors to the policy decisions taken by the government as well as their belief in our long-term growth story.
We also continue to see strength in India's consumption story and believe there is ample scope for growth. In the past two years, the rural economy had suffered significantly with agriculture production taking a hit due to drought and a decline in minimum support price of food items. This year, however, the rural economy is on a strong recovery path with robust growth in crop production and rise in MSP. This is expected to benefit rural consumption, which will be beneficial to the overall growth of the economy. The traction in retail loans has also picked up over strong consumer sentiment. The recent rate cut will further accelerate consumer demand as loans will become cheaper. This strong momentum in consumption is expected to translate into higher corporate earnings, which had remained weak in the past two years.
The economic revival, improvement in consumption and further possibility of rate cuts will increase corporate earnings. It bodes well for the Sensex as it is expected to see strong growth of 14-15 per cent. At the current level, the Sensex is trading at 16x of the 2017/18 expected earnings. As corporate earnings pick up and the economy gathers momentum, we expect it to reach new heights.
By, Dinesh Thakkar, Chairman and Managing Director, Angel Broking