FocusPoint
Investment View - ING Investment Management expects strong growth and high inflation in India
ING Investment Management (ING IM) is forecasting strong growth in India, but it also warns of rising inflation.
ING IM’s forecast comes on the back of accelerating economic growth in India, which has been fuelled by a dramatic rise in consumption levels. Normally, capital expenditure follows consumption in the economic cycle, especially now as ING IM points out that India currently has a high capacity utilisation rate of 82%. Given this, it expects Indian investment growth to rise dramatically into double digit territory.
Maarten-Jan Bakkum, global emerging market equity strategist at ING Investment Management Europe, commented: “The strong performance of the Indian economy reflects the healthy dynamics of growth, which include an expanding labour market, a rising middle class and liberalisation of the economy. However, due to aggressive fiscal policy, private investment runs the risk of being crowded out by public investment in the next few years. In addition, because of loose monetary policy, inflationary pressure has been rising.”
In 2009, most of the rise in inflation came from higher food prices. With domestic demand growth rising fast now, and with capacity utilisation running at high rates, ING IM expects this to lead to more inflationary pressure in the Indian economy.
Maarten-Jan comments: “If food prices do not come down in the coming months, inflation could rise further. The central bank has started to raise reserve requirements but it is likely to start hiking interest rates soon, probably before the next rate setting meeting in April.
“As a result of this view, we are maintaining an underweight position in India in our global emerging markets equity fund. We see India as one of the few emerging markets where inflation risks are too high for comfort. Once we see the first few interest rate hikes and a downward trend in inflation, it is likely that we will then move to an overweight position to benefit from the strong internal dynamics of growth,” Maarten-Jan concludes.
To view the complete story, click the “Download” button above
Relevant links
Senior Investment Specialist Ad van Tiggelen about Asset Allocation in October.