High interest rates and sluggish investment demand are expected to continue, according to BNP Paribas. It has also opined that there is no differentiation between BJP and Congress election manifestos that gives any indication of ‘pro-growth’ investment policy

In its recent note on Asian and Indian market outlooks for 2014, Manishi Raychaudhuri of BNP Paribas has said that there is no differentiation on the election manifestos of both BJP and the Congress and estimates that the India GDP will slide to a 22-year low of 3.7% during 2014 and then will recover to 5.3% by 2015. The note, unusually bearish for a foreign broking firm, said, “Buffeted by the triple whammy of high interest rates, fiscal consolidation and sluggish investment demand, we believe GDP growth will slide to a 22-year low of 3.7% in FY14, with a partial recovery to 5.3% in FY15.” BNP Paribas is cautious in the medium term, expects the Reserve Bank of India to remain hawkish and has picked Tata Motors as one of the stocks that is expected to do well as part of its overall Asian strategy. BNP Paribas also expects the USD-INR exchange rate to touch Rs66 per dollar by 2015. It has also cited politics as a factor to economic growth.
 

No differentiation in BJP or Congress election manifestos
 

Opining on politics, the note said, “Our analysis of the Congress and BJP manifestos reveals little difference between the parties’ poll promises. We find no rationale in the manifestos for assigning ‘pro-growth’ or ‘industry-friendly’ intentions to any one political group.” Further, it said, “Our analysis of electorate demographics, seat share and vote share across states shows that the hurdle for the BJP-led NDA to regain power remains high. For a change in government, a significant swing in favour of the opposition party would be necessary – the kind of swing that’s been seen in only one election (in 1998) of the past six elections.
 

Cautious on stock markets despite optimistic forecast
 

BNP Paribas is cautious on Indian stock markets despite giving rosy forecast. It expects BSE Sensex to rise 14.7% in 2014 and 15.3% in 2015, but admits that it maybe too optimistic. It said, “In the medium term we remain cautious about earnings estimates. BNP Paribas’ and consensus estimates indicate 14-15% earnings growth for Sensex in FY2014 and 2015. We think such growth targets are too ambitious, given that past 5-6 years have seen single digit earnings growth. On current EPS estimates, Sensex is trading at 14.6x 1-year forward EPS, marginally lower than the long term average of 15.2x. However, that average itself may decline going forward, as the average captures the spectacularly high growth years of 2003-07.”

Strong rural demand
 

On the plus side, Indian growth has been driven by strong rural consumption, thanks to a good monsoon and better-than-average agricultural produce, as well as strong exports (thanks to a weaker rupee). Strong rural consumption is indicated by strong two-wheeler and tractor sales.
 

BNP Paribas said, “India appears to be an economy firing on only two (one-and-half?) cylinders—rural consumption and exports.” However, BNP Paribas has “little to else to cheer in the Indian economy” beyond rural consumption, weaker rupee and exports.
 

Current account deficit to ease…
 

They expect current account deficit to ease and lower expectations. “We believe a better export performance and lower imports mean that the problem of high current account deficit and the need for ‘hot money’ financing will be much lower in FY14 and FY15,” the note said. BNP Paribas expects the current account deficit to be at $52 billion (or 2.8% of the GDP) by 2014 and ease to $47 billion (or 2.3% of the GDP) by 2015.

… but RBI to remain hawkish

BNP Paribas expects Raghuram Rajan of RBI to raise interest rates by at the most 50 basis percentage points, as a measure to contain rising food inflation. If true, this is likely to put brakes in economic growth. “The RBI’s policy rate hikes and governor Rajan’s commitment to target CPI rather than WPI inflation should keep interest rates higher for longer—we expect the RBI to hike rates by 25-50 basis percentage points, and maintain it thereafter for most of 2014.”
 

Tapering continues to be a worry
 

India remains vulnerable to tapering even as the chorus only seems to grow louder as US economic data is improving. BNP Paribas said, “We believe economies with macro imbalances (India and Indonesia, most prominently) will remain vulnerable to the withdrawal of monetary accommodation globally.”
 

The Federal Open Markets Committee is scheduled to be held on 17^th and 18^th of December, while RBI Policy meet is scheduled to meet on 18^th December. These key events could decide the stock market movement going forward and whether the US Federal Reserve will taper or not.