India need not worry about US Fed lift-off: Nomura

Says India will be one of the most resilient in Asia after a Fed lift-off

With the US Fed reiterating its resolve to break from the seven-year of near zero interest rates this year, Japanese brokerage Nomura today said India does not have to worry much about its impact as a sustainable recovery is underway in the domestic economy.

"India will be one of the most resilient in Asia after a Fed lift-off. We have seen substantial improvements in the balance of payments and in the macro stability," Nomura analysts said at a conference call today.

The brokerage attributed the optimism to the heightened expectations on the reform outlook under Prime Minister Narendra Modi and also a stable and predictable monetary policy under central bank Governor Raghuram Rajan.

Describing India as one of the best turnaround stories globally, the brokerage said the recovery is only a beginning.

"The pickup is expected to be more gradual than past cycles owing to subdued foreign demand, limited room for further monetary and fiscal easing and balance-sheet constraints for banks and infrastructure companies. On the other hand, we expect the expansion to be more sustainable than in the past cycles," it said.

The brokerage said with events like expected Fed tightening , it is "overweight" on Indian equities and expects a surge in corporate earnings with the economic recovery and also a surge in dividends.

On the fixed income side, it said the brokerage prefers only Indian and South Korean government bonds, with a preference for the 3-5 year paper in the domestic market.

The US Fed chairman Janet Yellen last week had said she would be hiking rates in 2015, which will signal a shift in stance from the years of monetary policy accommodation wherein the interest remained at 0.25 per cent.

During this period, the US Fed undertook a host of actions, including two rounds of controversial quantitative easing programme to stimulate the growth.

Following the Fed's hints of shifting the easy money stance in mid-May 2013, India was one of the worst hit by the capital outflows and the rupee depreciated to all time high of 68.85 to the dollar by August of that year.

On the rupee, Nomura said it expects the currency to fall to 64.40 by December and recover to 63.7 by March 2016.

It today said the country has adequate reserves to fight such a situation now and added it, along with many others like Korea, are likely to benefit through the strategy of "differentiation" among emerging markets, which investors will be adopting in case of a Fed hike.

It said Asia is expected to be resilient to the hike due to a host of factors like the hike being already anticipated, and also the QE programmes of the European and Japanese central banks which collectively are putting in more money to the market than what the US Fed has done.