Buoyant stock markets will improve investor sentiments

Jan 07 2013, 12:46 IST
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SummaryAs we move to 2013, the trend governing the story going forward is that of mean reversion.

By the last quarter, G-sec yields may harden; very short-term instruments to remain protected due to low repo rate

As we move to 2013, the trend governing the story going forward is that of mean reversion. I believe that growth will accelerate, inflation will moderate, asset prices will rally and interest rates will come down, for most part of the year 2013. But unfortunately, this trend will not be able to sustain as the year approaches its end.

Going forward, it’s difficult to see any substantial (incremental) risks to growth both domestically and globally. I see a very low probability of us doing worse than what we did in the first decade following the New Economic Policy, that said, I also completely rule out the possibility of us growing anywhere near 8%, which in fact is the average of the last ten years. Our view that the economy crawls back on the growth ladder is based on stable global macro environment, better liquidity and lower inflation, which will then pave the way for lower rates. To me growth in 2013 is floored at 6% and capped at 7%. Thus, I predict that we would grow at 6.5% in the coming year. As far as the composition of growth is concerned, most of the delta in it will come from investment. This is based on the assumption of a friendly government and a benign RBI that does the trick of reviving investor’s sentiments. Today, large projects are stuck because of various bureaucratic delays, with the help of CCI, these will begin to get cranked up, construction will recover, small manufacturing units will start expanding their capacities as they see green shoots of recovery in demand, buoyant equity markets will improve investor’s sentiments and will eventually raise more equity, urban consumption will begin to gain traction as employment expands and real income growth improves due to lower inflation, rural consumption will stabilise at moderate levels. Net net, consumption growth would mean revert to 5.5%. On the supply side of the economy, I expect industrial growth to recover to 6.5%, which is the average growth of last 20-30 years. Services is expected to stabilise at low 7% and agriculture is likely to grow at 3%, which again, is its long-term average growth for last many decades. All this put together will take us to a 6.5% growth.

Inflation? Since the 2008 crisis, we have witnessed three

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