The political landscape over the next five years should be dramatically different than the previous five years, with the Modi government running the first majority government in 30 years, according to Bank of America Merrill Lynch (BofA-ML). "Along with the changed political landscape, many economic themes in India should be considerably different over the next five years. This will likely shape the direction of the markets as well as the components of future growth," it opined.
BofA-ML has identified 5 evolving themes in India. These are increase in urban income, stable rupee, interest rates, earnings upgrade cycle and pick-up in investments.
Acceleration in GDP growth along with lower interest rates should lead to urban income rising faster than over the past five years, BofA-Ml said. Rural income will likely continue to grow at a healthy clip but probably slower than the past five years as product prices increase at a slower pace and rural wage growth eases off.
Over the past five years, INR has depreciated 27%. "Near-term worries of US dollar strength aside, we think the currency will be flat to slightly stronger over the next five years as (a) Current Account Deficit remains under control: 1.4% this year vs. near 5% in FY13 and (b) RBI re-coups reserves: import cover rises from 7 months in 2013," BofA-ML said.
Over the past five years, interest rates increased 300 bps. BofA-ML thinks a lower fiscal deficit and lower inflation will enable the RBI to cut rates.
From a sharp spell of earnings downgrades over the past few years, BofA-ML expects earnings to be upgraded from next year. "Over four years, we see earnings in India doubling as operating leverage leads to mean reversion in margins."
Investment spend to drive GDP, said, BofA-ML. "This is a late cycle play and will probably be seen over the next 24 months as business confidence improves and government accelerates project clearances."
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