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For Investors, India Looking Even Better Than Before

This article is more than 9 years old.

India is back.  This is fast becoming the favorite market for emerging market investors.  It's definitely the best of the BRIC countries, with the Wisdom Tree India (EPI) exchange traded fund up by more than 30%.  Apparently, there is more room for this baby to grow.

On Friday, the government released first quarter data for its fiscal year 2014-2015 (April-June by India's calendar) showing 5.7% year-over-year growth, beating consensus forecast of 5.5%. This follows 4.6% yearly growth in the fourth quarter of fiscal year 2013-2014 (January-March).

Friday's data shows that this year certainly started off on a materially stronger note compared with the previous two years. Moreover, economic sentiment continues to improve following the May landslide victory of the Bharatiya Janata Party and its newly minted Prime Minister, Narendra Modi.

"I love this guy," said Peter Kohli, chief investment officer at DMS Funds in Leesport, Pa.  Kohli is one of the many emerging market investors that has become bullish on India since last September when Raghuram Rajan took over as governor of the Reserve Bank of India.  In January, when it became clear that the incumbent Indian National Congress had no chance of resuming power in the parliamentary elections, the market began cheering for business friendly Modi.

Following Friday's data release, Barclays[/entity] Capital maintained its 2014-15 GDP growth forecast of 5.7%, with risks to the upside.

India's GDP growth got its boost from government investment primarily, while consumption and net exports contributed less in the first quarter.

Even though consumption and exports lagged, the market is really looking for signs that the Modi government is going to deliver on policies and projects that stimulate growth.  One area everyone is keen on is infrastructure. India is far and away the poorest of the big four emerging markets. It has massive infrastructure needs. Not only roads and public transportation, but also public utilities like electric power generation.

Impatient financial pundits have said Modi will never live up to the hype. His role as India's economic and political manager is still relatively raw, having taken over the ship of state in late May.  They hype might have warn off, but few doubt Modi will be a failure.

"Good progress is being made, and (we) expect further healthy growth for the economy this year," wrote Craig Botham, an economist for Schroders in London.

Botham points out that the risk to Indian growth this year is whether disappointment over reform efforts translates into declining sentiment and reduced investment. "Given the strenuous efforts being made to keep the project pipeline flowing, this seems a relatively minor risk for now," he says.

Meanwhile, firmly in the hands of Rajan at the Reserve Bank, monetary policy risks are likely to remain tight for some time.

In its latest annual report, Bank indicated that growth is likely to be close to 5.5% this fiscal year and the inflation target of 8% is likely to be met by January.  But risks to the 6% target in January 2016 are to the upside.  Rajan has reiterated his commitment to keep monetary policy restrictive to achieve medium-term price stability in India.

At the last policy meeting, Rajan refrained from making his future rate action bias explicit, instead keeping all options open for the coming months as he continues to emphasize that the central bank’s action will be data dependent.