Investors have high expectations from the Indian economy under the Modi-led-NDA regime and are betting big on India. Both equity and debt markets have been hoping better days ahead. While it may take a little longer before Indian economy passes the litmus test of strong recovery, some green shoots are instilling confidence.

After languishing a for quite a long, in the April-June quarter of the fiscal year (Q1FY15) India's Gross Domestic Product (GDP) witnessed a growth of 5.7% - the fastest rate recorded over last 9 quarters and depicted signs of breaking shackles.

Is Indian economy on a take-off?

(Source: CSO, PersonalFN Research)

You see, in Q1FY14 (i.e. over April-June quarter of last fiscal year), the Indian economy grew at 4.7% and for the entire fiscal year 2014 economic growth on average basis came near that level. Thus against this backdrop, Q1FY15 GDP growth rate of 5.7% looks encouraging. A strong performance by manufacturing as well as services sectors have attributed to this uptick in growth. Moreover, despite a tad underperformance of agriculture in the current fiscal so far, the Indian economy has remained relatively resilient.

Agriculture recorded a growth of 3.8% as against 4.0% in Q1FY14. Manufacturing sectors which account for nearly 15% of India's GDP, grew collectively at 3.5% in Q1FY15 as against a contraction of -1.2% recorded in Q1FY14. Similarly, the services sectors which collectively account for nearly 2/3rd of GDP recorded a growth of 6.8% in Q1FY15 vis-à-vis 6.4% registered in Q1FY14. Likewise, mining displayed revival by expanding at 2.1% in Q1FY15 as against a contraction of -3.9% in Q1FY14.

But would the strong momentum be maintained?

Well, the future of Indian economy largely hinges on how corporate Inc. performs and how the investment cycle progresses. Some positives that might aid in faster growth are:

• The Government's plan to put chronically stuck developmental projects in the fast lane
  
  
• Attempts to improve governance that could reduce bureaucratic impediments
  
  
• Revival in manufacturing and encouraging data of the service sector
  
  
• Heightened confidence of investors' in the Modi-led-NDA Government as it rests hopes on reform measures
  
  

Nonetheless there are some factors that may dent expectations, which are...

• Higher inflation
  
  
• Geopolitical tensions
  
  
• Global economic headwinds that could dampen business confidence
  
  

Impact on Markets:
Equity markets have been strong and bond markets steady on the announcement of higher GDP growth. The S&P BSE Sensex is scaling towards 27,000-mark. The current rally is broad-based across sectors and market capitalisation segments - viz. large caps, mid caps and small caps. This signifies a period of risk-on, where investors are indulging in taking high risk.

As far as Indian debt market is concerned, investments worth Rs 16,000 crore made by Franklin Templeton through its foreign funds in India's sovereign debt suggests that demand for Indian debt is high among foreign investors and possibly they are perceiving an upgrade for India's sovereign rating with improving macroeconomic variables.

What should investors do?
PersonalFN believes a 9-quarter high GDP growth is certainly a positive for the economy. However, the further progress of economy depends upon several factors. It would be too early to call it a start of a new high growth phase. Inflation has been one of the biggest obstacles that may impede the progress. Another worry is state of Government finances. By the end of July, India has utilised nearly 61.2% of fiscal deficit target. This may limit the ability of the Government to spend on developmental projects. Corporate balance sheets in Infra segment are already leveraged and have a little room for assuming higher loans, which in turn may impact the success of Public Private Partnership (PPP) model. So, the Government will have to find out the alternatives. Asset quality of banks has already deteriorated. Unless infrastructure segment along with manufacturing records higher growth, sustaining growth momentum may become difficult. Global factors would have their own weight on the progress of Indian economy.

In this backdrop, market expectations appear to be running slightly ahead of fundamentals. Equity markets are sailing in the 'overvalued' zone. Markets may maintain their upward journey only if growth continues to outpace expectations. Under such conditions, PersonalFN is of the view that, rather than getting aggressive about investing in equity assets, you should be cautious of a sharp correction which might kick in any time. So, given that, it would be wise to stagger your investments rather than going gung-ho getting swayed by the exuberance in the market. You shouldn't buy aggressively, rather buy selectively. Thoughtlessly investing or speculating can be hazardous to your wealth and health. You see, don't allow history to repeat itself, where in the aftermath of 2008-09 investors burnt their fingers and opted to sit out of the market nearly for 5 years. Whether you are buying stocks or mutual funds you need to choose them carefully. While buying into mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

As far as debt markets are concerned, fiscal deficit and inflation are the biggest worries. Therefore one needs to adopt cautious approach while investing in fixed income assets as well. There is yet risk investing at the at the longer end of the maturity curve and it appears unlikely that the Reserve Bank of India (RBI) would reduce policy rates this calendar year. PersonalFN thinks that, one should not hold more than 20% of their debt portfolio in longer tenure funds. While G-sec funds may start delivering returns as policy rates start to relax, going overboard now may not be prudent until macroeconomic scenario gets clearer.

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