India's economy still stuck in a rut: HSBC

Tags: Economy
India is "stuck in a rut" as weaker consumption and stalled investments prevent the economy from building any sort of momentum, HSBC said in a report today adding "slow recovery" could start post elections.

According to the global financial services major, the year 2014 could thus prove to be a tale of two halves. In the latter half of the year, there would be some economic recovery and return to normal business conditions.

"Pent-up demand should be released after the elections are over," HSBC said in a research note adding that "given that passions are running high, the outcome could bring considerable volatility to Indian equities."

HSBC for now is "underweight" on Indian equities but some of its preferred sectors include energy which is likely to gain from subsidy changes, power (stands to benefit from distribution reform), non-ferrous metals (corporate restructuring) and telecoms (more clarity post the auctions).

"We stay underweight India for now. Prefer sectors such as energy, power, non-ferrous metals and telecoms," HSBC said.

On price rise, the report said while inflation is coming down from the near 10 per cent levels witnessed in 2013, the demand pressure prevents inflation from falling to levels seen some years ago.

"We would add that India's central bank seems to have shifted its bias from growth to inflation fighting and, thus, remain of the view that Indian interest rates might remain elevated," the report said.

Reserve Bank Governor Raghuram Rajan had raised the key policy rate by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.

After Rajan took over as RBI governor, the central bank increased key policy rate three times by 0.25 per cent each.

According to HSBC, the completion of the elections could spur rotation into under-owned investment oriented sectors, but overall flows are likely to remain subdued in the backdrop of a Fed taper.

"As of now we stay underweight on India in the regional context," HSBC added.

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