In their latest note, Nomura is cautiously optimistic about the recovery prospect of the Indian economy in the face of current account deficit, and believes that it easing of the deficit is a positive. It is bullish on IT services, pharmaceuticals, non-PSU oil & gas and private banks

Nomura Financial Advisory and Securities (India) Pvt Ltd is cautiously optimistic about the prospects of the Indian economy but still finds it weak. In a research note it said, “The reason we are not outright bullish on the market is that the medium-term outlook on growth still remains weak. At 13.4x 12-month forward consensus based earnings, the market’s earnings multiple does not provide much comfort when compared to its 14.3x five-year average, which covers a period when India’s GDP growth averaged above 7%; the median street forecast for FY14 GDP growth is currently at 4.7%.”
 

Nomura has stated their preference for exporters such as IT services, pharmaceuticals, and non-PSU oil & gas.
 

However, it finds that growth differentials between India and her trade partners have narrowed down, which has been helping the deficit to be bridged. Imports have reduced while exports have increased, which bodes well for India. The note said, “We expect differentials to remain low, with positive implications for both exports and the trade deficit.”
 

It goes on to say, “A cheerier outlook on the current account deficit (CAD) augurs well for the rupee. After all, the rupee’s high-beta status was a result of large twin-deficits in the backdrop of steadily falling growth differentials.”
 

Even though festival season is upon us, with the ongoing Navratri celebrations and Diwali next month, India’s gold imports have been culled and controlled, on the back of restrictive measures taken by the government. This has eased current account deficit and boosted the rupee. “The flood of gold imports seen since 2011—which on their own destroyed India’s external account metrics in FY12 and then again in FY13—has been reduced to a trickle over the past two months,” the note said.  According to the note, India imports fell 18% in September while exports increased 11%. This is a positive metric and a sign that current account deficit is stabilising.
 

Speculations have been made about the US Federal reserve tapering bond purchases this year. However, uncertainty still persists and Nomura feels this is positive as it gives Indian policy makers breathing space to accommodate domestic monetary policy. The note said, “Market concerns of an imminent Fed-taper, in all likelihood, have been pushed further down the road given the negative growth and sentiment implications of the current fiscal impasse in the US. This provides breathing space for domestic monetary policy.” It remains to be seen what stance Raghuram Rajan would adopt, but it is expected to be hawkish until inflation is reined and deficits bridged.
 

Apart from IT services, pharmaceuticals, and non-PSU oil & gas, Nomura also prefers private banks to PSU-banks due to worsening asset quality of the latter. “We remain concerned on the asset quality cycle of PSU banks amidst growth worries and have a clear preference for private banks within rate-cyclical,” Nomura adds.