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Goldman adds to glitter

Mumbai, Nov. 29: Goldman Sachs has forecast that India’s GDP growth will accelerate to 7.2 per cent next fiscal. It also believes that the Reserve Bank of India will cut interest rates by 150 basis points over the next three years.

The US investment banker has upgraded Indian stocks to overweight as a result.

In a report that played a key role in propelling the benchmark index above the 19000 level, Goldman Sachs said the Indian economy would gradually improve in the next year, particularly from the second half. Tushar Poddar, chief economist at Goldman Sachs, said there were three factors that would underpin the economy: lower oil prices, decline in current account and fiscal deficits, and a dip in inflation.

Moreover, a more favourable global outlook, from the second half of next year with a reduction in Euro area “tail risk’’ and an improvement in US growth would also bode well for the domestic economy. With central banks in developed markets likely to remain in easing mode, liquidity conditions were likely to remain benign and this could spur capital flows to emerging markets.

Poddar and two of his colleagues added in the report that growth in the Indian economy would gradually pick up to 6.5 per cent in 2012-13 and 7.3 per cent in the following year on the back of easing financial conditions, partly driven by some reduction in policy rates, a continuation of reforms boosting confidence and a normal agricultural crop.

According to Goldman Sachs, a continuation of structural reforms is a key aspect that underpins its views. The investment banking firm said while measures such as goods and services tax, direct cash transfer of subsidies and dedicated freight corridor would spur reforms on fiscal consolidation, financial liberalisation and infrastructure growth would be needed to sustain the growth trend.

“If a sizable number of reforms are implemented in the near term, we could see a sharper rise in business confidence, and a strengthening of potential growth,” Poddar said.

The Goldman Sachs’ forecast has downside risks and this can emanate from high and persistent inflation that will make it difficult for the RBI to ease rates, thereby hindering the economic recovery. A lack of progress on structural reforms could also hurt investment sentiment in the near term and potential growth in the medium term, the report said.

 
 
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