A Perspective on India
A CHALLENGING 2008
After four consecutive years of strong gains, Indian equity markets have shown signs of aslowdown in 2008. The downturn could be attributed to a combination of factors, includingweakening global sentiment and concerns regarding domestic inflation and growth. Globally,there has been a reassessment of the risk premiums attached to equities as an asset class inlightof weakening growth and uncertainty about the extent of the impact to credit markets.In India, recent data has pointed toward a moderation in industrial production and risinginflationary pressures. Positive foreign institutional investor (FII) flows, combined with stronginflows from domestic insurance companies and mutual funds, were all large contributors forcapital inflow and clearly led to momentum buying in certain sectors. However, as liquidityflows have begun to decline, a reversal of last year’s trends has begun to take place. Many of the sectors that had moved ahead of fundamentals last year due to momentum buying, suchasconsumer goods and information technology, have not sustained investor interest. This year,astrends have begun to reverse, many investors are focusing more on fundamentals.
SEPTEMBER 2008 INVESTMENT INSIGHT
Franklin Global Advisers
INDIAN ECONOMY Key implications—demand and investment
Economic growth in India has been above trend for the past few years and has been aided bytheavailability of capital, low domestic interest rates, and strong FII flows. These factors havehelped push domestic consumption and investment in recent years. The Reserve Bank of India(RBI) began to tighten rates over the last couple of years in order to moderate strong creditgrowth and avoid a bubble scenario. Rising rates and input costs appear to have impactedgrowth in interest rate sensitive sectors and RBI’s efforts to contain credit growth have clearlyhad an impact. The slowdown in industrial production numbers is an indication of the sametrend. However, we should keep in mind that the composition of the index of industrialproduction is outdated and that India is predominantly a service-led economy.
73.1 -37.4 MSCI India Index17.4 -6.5 FII flows** (US$ billion)-3.8 -24.5 BSE IT34.7 -14.6 BSE FMCG149.4 -47.6 BSE Power92.2 -63.1 BSE Realty81.0 -47.2 BSE Bankex117.5 -52.1 BSE SmallCap89.4 -47.3 BSE MidCap75.4 -34.0 S&P CNX Nifty64.7 -34.4 BSE Sensex
2007 YTD 2008* % Change
All returns in USD.*As of 31 July 2008.**FII flows as of 30 June 2008.
At this stage, the Indian economy is facing headwinds in terms of inflationary pressures and policy responses (fiscal and monetary) totame increasing prices. We expect economic growth and consumerdemand to be impacted by recent price increases and higherborrowing costs. The expected wage increases as a result of the SixthPay Commission recommendation and farm loan waiver could boostconsumption, but are likely to worsen the fiscal deficit.
CORPORATE INDIAKey implications—earnings growth
In recent years, strong economic fundamentals and readily availablecapital boosted the confidence of Indian companies, which havedelivered earnings growth of nearly 30%. Growing confidence wasalso reflected in the sharp rise in the number of overseas acquisitionsmade by leading companies as they sought to increase their global
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