DBS pegs FY15 GDP growth at 5.5% on positive poll outcome

Singapore-based brokerage DBS has forecast a moderate spike in India's FY15 GDP growth to 5.5 per cent on a positive poll outcome leading to a stable government taking office after the upcoming elections.
"GDP growth can be expected to improve moderately from an estimated 4.8 per cent in FY14 to 5.5 per cent in FY15. Bulk of this should stem from higher capital formation, up 4.5 per cent from less than 2 per cent in FY14.
"Despite this, we don't expect overall growth to return above 6 per cent anytime soon," DBS economist Radhika Rao said in a note, 'Elections is about the economy, not just markets', today.

She discounted a major rout in the equity and forex markets in case of an unexpected negative poll outcome, saying most of the risks could have already been factored by mid-May.
The Dalal Street has been on a song for the past few weeks. The Sensex today hit a new life-time high of 22,340 points, while the broader Nifty shot up by 54.15 points to a new record closing high of 6,695.90. The rupee shot up to near 9-month high of 59.91 vs dollar on continued foreign buying.
The rupee has gained over 14 per cent from its worst level on August 28 last when it had plunged to a low of 68.85 to the greenback. The markets are betting on a Narendra Modi-led government post-polls.

Rao said in the immediate term, the positive impact on sentiment and financial markets will be palpable, with the feed-through into real output working with a considerable lag.

Noting that the markets are euphoric ahead of the elections, she said "unfortunately, the future of the country rests not with fickle market sentiments, but with a concrete economic agenda by the next government."
To return to a sustainable growth path, the new ruling bloc will have to keep addressing the macroeconomic imbalances and until then, RBI may maintain its tight monetary stance.
Expecting a stable but coalition government, Rao said if at all the outcome is a bit disappointing, it will not lead to a massive flight of capital.

"The ongoing equity rally has room to run until the poll results become certain in mid-May. The rally could extend if the results are favourable but the upside would be limited because much of the good news would have been discounted.
"After last year's crisis, foreign portfolio investors have invested heavily into India's equity and debt markets since start of this year. Since last September, net foreign equity holdings have risen by USD 11 billion, while debt increased by USD 2.5 billion," she noted.