Sukumar Rajah
Director and Chief Investment Officer - Equities
Franklin Templeton Investments India

The results of India's general elections were declared over the weekend and delivered a clear win to the incumbent United Progressive Alliance (led by the Congress party), in contrast to expectations of a fractured polity. These results led to a sharp rise in its equity markets and trading on India's two bourses, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) was halted for the first time ever, after their indexes hit their upper circuits.

The spurt reflects investors' desire to increase their exposure to Indian equities following the clearing-up of political uncertainty. While the case for investing in India had remained strong in terms of medium- to long-term economic and corporate earnings growth, many investors were waiting on the sidelines due to the elections. As the euphoria over the outcome of these elections wanes, policymaking, foreign institutional investor (FII) inflows and global conditions are likely to influence the direction of India's markets.

Elections And Policy Making

The clear mandate with an increased share of votes in favor of the ruling party bodes well, as the party will probably not be encumbered by coalition compulsions. This is likely to lead to continuity in policy making and a possible acceleration of the reform program. Over the medium to long term, the government needs to clearly address the burgeoning fiscal deficit and implement key reforms, including an increased focus on infrastructure development. Successful execution could lay the foundation for sustainable economic growth over the years and decades to come.

Economy

On the economic front, we have witnessed initial signs of improving demand in sectors such as autos and cement. As the monetary and fiscal stimulus measures percolate through the economy, we are likely to witness further signs of revival. However, given ongoing weak external demand, growth in export and export-related sectors is likely to remain muted. The Indian Meteorological Department has forecast a near-normal monsoon for 2009 and this, along with various rural initiatives, should benefit the rural economy.

Despite the recent deceleration in growth, the Indian economy remains one of the strongest in the world and is likely to be one of the fastest-growing economies this year as well as over the medium to long term, due to its lower dependence on exports and high services component. High economic growth could boost demand for goods and services, and high-quality Indian companies could benefit from the consequent growth opportunities.

Our Strategy

We have remained fully invested during the past year and used the recent declines to increase exposure to attractively valued companies. Our investment focus continues to be on fundamentally strong companies that have the potential to take advantage of the opportunities arising from India's long-term growth.

Posted: 19 May 2009