NAB: Here's why India's economy will outperform next year, and why you should be looking to invest

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In what has been a tough year for emerging market economies, there has been one standout performer – India.

The world’s second most populous nation has managed to buck weakness seen in other major emerging market economies – particularly the other three “BRIC” nations of Brazil, Russia and China – in recording a stellar growth rate of 7.3% in the nine months to September.

It’s been an amazing performance given dire circumstances elsewhere in the world, and India’s form is set to continue into 2016.

That’s the bullish view of Christy Tan and Julian Wee, Asia market strategists at the NAB, who suggest that the Indian economy will outperform on the growth and inflation fronts compared to regional peers.

The chart below reveals why the NAB expects India will continue to “lead the pack” in Asia in 2016. It tracks forecasts for economic growth and inflation against recent historic averages.

Of all nations covered, India is the only nation where they expect above average growth with below average inflation.

According to Tan and Wee, it’s a scenario that looks set to allow for further monetary policy easing from the Reserve Bank of India (RBI), adding to strong growth momentum, likely inflows into Indian equities and bonds and relative strength in the Indian rupee.

Here’s why they’re bullish.

India’s growth and inflation for 2016 place it at front of the pack in Asia. NAB’s India economist John Sharma expects another 50bps worth of cuts sometime in the year. With the current account deficit having shrunk to a very manageable 1.3% of GDP, India is no longer “fragile” like it was in 2013.

Along with additional monetary policy stimulus, they believe economic growth will continue to accelerate on the back of higher levels of consumption.

The strong momentum is supportive of NAB’s outlook for GDP growth of 7.5% in 2015 and 7.6% in 2016. The 7th Pay Commission is proposing a 23.55% increase in wages and allowances for government employees; this has the potential to raise future consumption expenditure.

Despite the expectation for further monetary policy easing, they expect the Indian rupee to remain well supported on the back of still-wide interest rate differentials, allowing it to outperform its regional peers and laying the platform for increased capital inflows into bonds and equities.

“We expect the INR’s rather healthy carry to see the USD/INR remaining relatively stable at 66 for 2016, outperforming its Asian counterparts,” they say.

“Portfolio inflows are therefore likely to remain relatively strong vis-à-vis other emerging Asia counterparts; this is definitely something to keep an eye on.”

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