What’s ahead for this major emerging Asian market? Will it turnaround in 2012?

“One of the biggest concerns for India in 2011 was that wholesale price inflation (WPI) averaged over 9% and rose to a high of 10% in September,” noted Teera Chanpongsang, Portfolio Manager of the Fidelity India Fund. “However it has dropped to 7.47% in December – the lowest level in two year due to a sharp fall in food prices.

“To curb inflation, the Reserve Bank of India (RBI) had raised its benchmark rate by 375 basis points in 13 moves since March 2010. This aggressive inflation-fighting strategy caused a slow down in economic activity over the year.

“The rate raisings tempered consumption and investment. Q2 GDP growth fell below the 7%-mark for the first time since 2009, while industrial production declined for the first time in 28 months.

“Now with the moderation in inflation, the RBI has started to loosen. In January this year, the RBI cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 as well as signalling future interest-rate cuts. While the central bank remains worried about the sticky trend in core inflation, it has opined that growth concerns are taking centre stage.

“Elsewhere, the government has not been able to push controversial yet necessary reforms ahead of upcoming state elections. For example, its U-turn on 100% Foreign Direct Investment (FDI) in multibrand retail, in face of stiff opposition even from its own coalition partners, did not go down well with foreign investors. That said, the government has recently cleared 100% FDI in single brand retail which is seen as a positive. As we go into 2012, many crucial government reforms are pending.” 

Mr Chanpongsang notes India’s economy is expected to grow 7% – 7.5% this year, “which would still be one of the best among major global economies.

“Robust growth in cement and automobile production and power generation continue to highlight the economy’s fundamental strengths. A positive surprise may come from agriculture in coming quarters as a good monsoon has boosted output and winter crop sowing.

“The key challenge is to revive industrial production and control inflation. The RBI will have more room to maneuver now that inflation has started to moderate and if weak global growth leads to a correction in commodity prices inflation could further come down, which could be very positive for equities.

“Market valuations look attractive and most of the corporate earnings downgrades seem to be behind us. The first half of 2012 could present an opportunity to build positions in good quality companies that have a competitive edge. Long-term growth drivers remain intact. Favourable demographics, increasing urbanisation, low household debt, robust growth in domestic consumption and a culture of entrepreneurship driven by a healthy corporate sector are likely to boost economic expansion in the long-term.”

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