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Indian equities have witnessed significant rise in the first quarter of this year and the results of the General Election in May could further provide a short term boost to the market, says a JP Morgan Asset Management report.
According to the report by the global fund house, stabilisation of the macro economy and policy response has provided some resilience to the equity market and perceptions about the possible outcome of the General Elections is providing additional support to the markets.
The MSCI India index has seen a 8.2 per cent rise in the first quarter of 2014, as compared with a (-0.4 per cent) drop in MSCI Emerging Market Index in US dollar terms.
"The changing of the guard and a reduction in the Congress Party's dominance of Indian politics have been viewed as catalysts to end India's economic lull, especially in corporate investment," the report said.
The report noted that the key to sustained gains in Indian equities in the medium term lies with domestic investors and not with foreign investors and added that "the elections in May could provide a short-term market boost".
Lok Sabha elections is scheduled to be held from April 7 to May 12 and the results are due to be announced around May 16.
Once the post-election excitement subsides, the economic growth momentum would take over as the driving force of the stock market, the report said.
While short-term sentiment is likely to be driven mostly by politics, credible economic policies from the RBI and an improvement in economic momentum are also much needed to facilitate a sustained turnaround in earnings, JP Morgan Asset Management said.
Meanwhile, the global liquidity environment, especially the Federal Reserve's policy intentions, would remain a source of volatility for the Indian equity market.
India's current account deficit has improved, while a weaker rupee has boosted export growth. Moreover, India's foreign exchange reserves have risen to USD 299 billion at the end of March, up from USD 276 billion in August 2013.