Is India’s Economy on the Path to Recovery?

Is India’s Economy on the Path to Recovery?

The year 2013 marked a strong period of recovery in developed markets, with the US and Eurozone emerging from recessionary conditions and posting stronger rates of growth compared to most of the yearly performances that have been since the 2008 financial collapse.  This has sent several major stock benchmarks into record territory and brought back all of the losses encountered by long-term investors over the last five years.  But what was perhaps most surprising about the economic activity seen in 2013 was the fact that many developing and emerging markets failed to match these optimistic performances. 

In fact, the strong rebound in growth that was expected for the economy as a whole was actually dragged down by some of the more dismal performances in emerging markets.  This created significant losses for bullish investors betting on a truly global recovery.  But when we look some of the region’s bigger economies, can we find evidence that the worst is behind us?  This year, can emerging markets move more in-line with developed market counterparts?

Prospects for India’s Economy

One of the best regional examples of these events can be seen in India, and there is growing reason to believe that the Indian economy will see much better growth scenarios in 2014.  “Market’s are looking for GDP growth in India to reach 5.5% this year,” said Rick Bartlett at SpecificFeeds.com, which offers a Free Forex Signal and Exchange Rate Tracker.  “The broader trends are suggestive of even better improvements next year, with growth expectations now seen closer to 6%.”

Part of this optimism is being generated by the country’s upcoming general elections, and the increased likelihood that economic reforms will begin to correct some of the deficiencies that have been seen over the last few years.  This could create new triggers for the economic in a variety of different areas, help stabilize downside risks, and generate new incentives for foreign investors.

Many of India’s central problems rest with its current account deficit and its rapidly plummeting currency values.  But since the Rupee has started to show signs of strength, many of these trends could start to come to an end as investor confidence starts to rebuild itself.  So far, GDP growth in India remains well below its averages and long term potential, so there are many reasons for optimism in the region going forward.  

Of course, it will still be important to monitor the performances that are seen in developed markets, as this is where demand expectations for exports will be largely defined.  The US Federal Reserve has already shown a commitment to its tapering programs in monetary stimulus, so any drastic revisions in these programs could lead to some stalling in the prospects announced for India’s GDP growth.  But, in any case, India still looks set on a more sustainable recovery relative to the worsening scenario that marked most of last year.  The country’s upcoming election results will be an early indicator of where we are headed next.

Market Implications

If we do start to see strength in the larger emerging market economies, we can expect stock markets to start stabilizing and another round of buying in high-yielding currencies.  Forex markets would likely begin to steer away from the US Dollar, as there would be reduced need to buy into safe haven currencies.  In addition to gains in the Indian Rupee, we would likely see gains in the Australian and New Zealand Dollars, as well.  This is because the forex environment would be more conducive to taking the added risks that are typically seen in volatile markets.  For these reasons, India’s growth performance this year will be highly relevant for forex traders.