Is the India growth story over?

With the declaration of India's quarterly GDP numbers last week everybody is asking whether the India growth story is over? The situation has a number of similarities with the gloom that prevailed during the latter half of FY 2008-09. India's GDP for FY 2011-12 has plummeted to 6.5%, lowest in last 7 years and even lower than 6.7% recorded during 2008-09. The Jan-Mar '12 quarterly growth comes at a paltry 5.3%, way below expectations of analysts. This led to a prompt call by international rating agencies for further downgrades in earning prospects of Indian economy for future quarters.

Investors are turning jittery as their portfolio's bleed. At this juncture, I would like to reassure the investors that this is not a good time to exit equity and other risk assets, but to prepare towards building a decent long term portfolio in the ensuing downturn. I always maintain that one's ability to analyse the future with reasonable accuracy is the key to make money in equity markets.The reasons for the current gloom in the markets was analysed by me and advised to you during by blog posts in the past 3 months, and presently all of those negative factors have almost played out as detailed below:

• Governance deficit/ policy paralysis has taken its toll on the GDP numbers. We have gone through a tough phase in Indian polity with a lame duck govt. and an irresponsible opposition playing havoc with economic issues.
• Indian Rupee has weakened the most amongst peers as it touched a lifetime low of 56.5/ $ during last week.
• Inflation continues to be stubbornly high, with food inflation refusing to come down. This leaves little room for RBI to lower interest rates.
• Global slowdown has accelerated further, with Euro zone crises coming back to haunt the markets. Chinese demand slowdown has hit the scenario of commodity demand tapering off.

However, when we have a closer look at the above issues, we would be able to see a silver lining for the future. With the Govt. pushed into a corner by the opposition and its allies, it may see it as a last opportunity to salvage its position with some bold reformist measures. We could witness a slew of reforms after the conclusion of presidential elections in July. Indian rupee after a massive fall is now poised for a consolidation in the 54-56/ $ range, given the oversold market conditions. Inflation will slowly start to move down with the progress of monsoon, and the fall in prices would accelerate after September '12. The euro zone crisis will act as a boon for Indian economy, with investors returning back to Indian risk assets once Rupee starts strengthening and inflation coming down. The fall in global commodity prices, especially crude oil augers well for Indian economy.

Future of Equity markets: Indian equity markets would enter into a consolidation phase now. The market is likely to consolidate around 4700-4800 levels on Nifty and the consolidation phase is likely to continue for next 5-6 months, after which there is likely to be a sharp upturn in India's fortunes. In the worst case scenario the markets are unlikely to fall below 4531 on Nifty (the lower bottom made during Dec.'11). Investors are advised to use the fall in markets for accumulating blue chip stocks: Example: BHEL/ L&T quoting at their historic low PE multiples.

Future of Commodity markets: As indicated by me in the past, precious metals like Gold/Silver have ruled firm in Indian markets, due the support extended by depreciating rupee. With the rupee depreciation having played out markets for precious metals may slide substantially during the next couple of weeks. Crude Oil has already slumped over 20% from its peek.