<div>Deutsche Bank continues to remain tactically bullish on Indian shares. The combination of global liquidity and return of flows to emerging markets should drive Indian equities higher, is what the banks' analysts believe. However, they have also cautioned that for a more sustainable rally the policy environment in India will need to improve considerably.<br /><br />Weak macro fundamentals together with injections of liquidity at regular intervals by central bank have compelled investors to become 'reluctantly bullish". "Show me the earnings" is the motto for markets in the current environment, says Deutsche Bank Asia equity strategist Ajay Kapur. <br /><br />Many G20 central banks have been moving to support growth through monetary stimulus. But the Reserve Bank of India is loathe to reduce borrowing costs, among the highest of major economies, until the government reins in spending on subsidies and increases capacity to fight stubbornly high inflation.<br /><br />Seaking at an event at Cornell University in Ithaca, New York, RBI governor D Subbarao reiterated on 28 August that inflation remains too high and needs to fall further or risk more damage to the economy, dismissing criticism of the bank's hawkish policy stance. He noted that much of the criticism of the bank's policy was coming from a "very articulate" growth lobby in India that includes companies, and said the central bank must also consider other constituents, including the poor who are hurt most by inflation. (<strong>Read: <a href="http://www.businessworld.in/en/storypage?storyUrl=inflation-still-key-threat-rbi&CategoryID=16628&articleId=506076&version=1.7&journalArticleId=507039">Inflation Still Key Threat </a></strong><a href="http://www.businessworld.in/en/storypage?storyUrl=inflation-still-key-threat-rbi&CategoryID=16628&articleId=506076&version=1.7&journalArticleId=507039">)<br /></a><br />However, despite being faced with its own domestic macro challenges, relatively speaking, India has experienced the shallowest downward revision to consensus earnings among its BRIC peers. EPS estimates for MSCI India have been revised downwards only by 2 per cent relative to 15 per cent and 5 per cent for MSCI Brazil and MSCI China respectively. In addition, in recent months, the velocity of the downward revision has accelerated for countries like Brazil, China and Korea, whereas earnings for MSCI India have stayed stable. Only Russia has witnessed positive earnings revision in July 2012.<br /><br />The analyst stresses that earnings and quality balance sheets will become the key factors for markets, more than ever before. In today's environment, investors may have to stop hankering after valuations. We expect companies and sectors — particularly with a shrinking investible universe — will see valuations continue to expand, in many cases, beyond recent historical highs. The premium for earnings predictability will only get richer, in our view.<br /><br />As per DB’s US economist Joseph LaVorgna, the combination of global liquidity and return of flows to emerging markets, should drive Indian equities higher. However, for a more sustainable rally the policy environment in India will need to improve considerably. While coalition dynamics continues to play spoilsport, fears of a sovereign rating downgrade may compel government to move ahead on politically contentious issues—FDI in multi-brand retail, fuel price rationalisation, etc. Recent developments such as conditional approval to RIL for KG-D6 spending budgets after a long hiatus suggest the government is trying to reach out to India Inc. We expect more such decisions.<br /><br />Earlier this month, Deutsche Bank analysts had remarked on the growing disconnect between the Indian market and economy. Analysts pointed out that the markets are clearly trying to look beyond the dataflow, betting on a major improvement in the policy environment. (<strong>Read: <a href="http://www.businessworld.in/en/storypage/-/bw/the-growing-disconnect/465314.37540/page/0">The Growing Disconnect</a> </strong>).<br /><br />The return of a pro-market reformer to India's finance ministry obviously cheered investors and contributed to the market rally.<br /><br /> </div>
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