Indian equities outperformed last year, with the MSCI India Index posting a gain just over 20%, and the positive investor sentiment should continue, he said.
“One of the key factors driving this optimism is that India’s chronic inflationary pressures, which have plagued the economy over the last few years, have finally started to subside.”
Weak commodity prices, particularly the fall in oil prices, has resulted in bringing down the inflation to the current level of around 5% compared to 11% at the end of 2013.
India is a net oil importer and the government’s balance sheet is currently benefitting from lower oil prices, which reduces both import costs and fuel subsidies.
However, Bhatia highlighted that a significant reversal in oil prices could be a dampener.
“The key risk would be a reversal of the sentiment that has been driving stock prices, namely the reversal of weak commodity prices,” Bhatia said.
Apart from this, India like any other emerging market, could see fund outflows if the US dollar continues to strengthen.
Vast long-term growth potential
Even as these risks persist, the strong mandate awarded to Prime Minister Narendra Modi and his reform-minded government makes it more likely that India’s “vast” long-term economic growth potential will be realised, Bhatia said.
Although the Indian budget presented at the end of February had no “big bang” reforms, there were still some positive measures, Bhatia said.
“These included a 25% increase in budgetary allocations to infrastructure capital expenditure, which should support growth given the economy’s infrastructure is in dire need of investment."