Why have Goldman Sachs and Morgan Stanley suddenly become optimistic about India?

Light at the end of the tunnel.
Light at the end of the tunnel.
Image: REUTERS/Amit Dave/Files
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Just two months ago, a host of global economic experts shared an extremely pessimistic outlook for the future prospects of the Indian economy. There were worries about the risks arising from the coronavirus lockdowns and the government’s limited ability to fire up the dwindling economy due to fiscal constraints.

But now, suddenly, some of the same experts seem to have changed their minds.

Over the last week, Goldman Sachs and Morgan Stanley have shared an extremely bullish outlook on the future prospects of India. In separate notes published last week, the two financial firms were overarchingly positive towards India, saying that the lifting of lockdowns will ensure that the country recovers faster than expected.

India economy expected to rebound

The biggest reason for the recent bullish sentiment about India is the view beyond 2020.

Even as Goldman Sachs expects the Indian economy to contract 9% in 2020, the firm estimates that it will rebound and see a 10% GDP growth in 2021 and 7.2% in 2022. Morgan Stanley is also bullish on India. The firm expects India’s economic output to reach pre-Covid levels in the last three months of 2020, and its GDP growth to be at 9.8% in 2021. In 2022, Morgan Stanley expects the Indian economy to grow at 5.7%.

Below is what the Nov. 11 report from Goldman Sachs said about India’s economic recovery:

On the fundamental side, the domestic macro recovery is underway as suggested by pick up in high frequency activity data points…As the economy recovers from the pandemic-induced contraction, we expect corporate profits to rebound 27% next year and a further 21% in 2022, after an expected decline of 11% yoy this year.

And this is what Morgan Stanley’s Nov. 15 report said:

The cyclical growth strength should be supported by a still accommodative monetary policy stance, recovery in external demand and the government’s spending directed towards rural and infrastructure areas. We expect steady improvement in private sector demand as the impact of Covid-19-related disruptions continues to dissipate.

Stock markets and company earnings

In a massive change of stance, Morgan Stanley raised its target for the BSE’s benchmark Sensex index to 50,000 by December from an earlier estimate of 37,300 by June 2021. The firm said:

Covid-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months.

The Indian stock markets are already celebrating these predictions. Today (Nov. 17), Sensex breached new heighs touching 44,000 during intraday trade. The index has risen around 70% since March 23, when it corrected sharply due to coronavirus outbreak.