While a global stock market sell-off continues to hit the Sensex hard, analysts at Citigroup are maintaining their fundamental economic growth forecasts for India. Citigroup sees a 9% gross domestic product growth and an easing of inflation to 5%, and suggests that India’s domestic demand will continue to drive growth.
“Unlike the May 2005 sell-off, the current correction resulted in a correction across all markets and all asset classes,” wrote Rohini Malkani, a Mumbai-based Citigroup economist for India, in a recent report. “India too was affected, but relatively less so.”
Citigroup estimates that the Sensex will be trading at around 13,700 by December but also adds a 10-20% upside to this number as they expect companies to report better earnings.
In a press conference, however, Citi also said that earnings growth may slow from 25% in the last few years to 15-20% in the next few years. The Sensex closed Wednesday at 12,529 points.
But, despite strong fundamentals for India, there are several situations in the US, China and Japan that could threaten the strength, the Citigroup analysts said. While they suggest these potential economic ripples need further analysis, they also conclude India will be relatively less impacted less.
Malkani says that opinions are divided about the extent of an economic slowdown in the US, but asserts that it is unlikely to be a problem for India. “The impact of a 1% reduction in US growth in the base case would have the smallest impact on [India’s] GDP growth, as compared to the region,” she says.
While 27 February marked the first time that China’s influence extended from the real economy to the global financial markets—starting a sell-off in most markets, China’s economy and markets should perform strongly barring major political mistakes, says Yiping Huang, Citigroup’s Asian regional economist. The main problem from a slow-down in China would be a pull-back from Indian iron-ore and alumina, whose exports to China have increased 12 times since 2000, according to Citi.
The Citi report was somewhat less optimistic about the impact of the yen appreciation on India.
“Besides the impact of the leveraged investors offloading high-yielding assets, which would then impact the stock market and INR, Indian corporates could also potentially lose if the yen appreciates significantly,” Malkani says. “The reason being the Indian corporate sector has also been a party to the carry-trade game.”
Citi hosted some 300 investors in a closed-door conference here a range of issues including infrastructure bottlenecks, talent shortage, bank capacity and inflation.