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Just as world markets reel from the downgrade of US debt, India has received an unexpected upgrade.
Goldman Sachs, the US investment bank, on Monday upgraded its outlook on the Indian economy from "?underweight' to "?market weight'. The nod of approval helped Sensex, the benchmark index on the Bombay Stock Exchange, make a climb-back from heavy morning losses triggered by global market fears.
In a note, the bank praised India's financial managers for combating inflation with monetary tightening measures over past months in spite of widespread criticism that central bank policy was too heavy-handed:
The latest move by the Reserve Bank of India to raise the repo rate by 50 basis points was a clear sign in our view that the central bank is vigilant in bringing down inflation expectations.
Goldman cited a likely turn in the macro cycle, lower oil prices, lower valuations and policy reform as reasons to be more positive about Asia's third largest economy.
Policy tightening was a necessary step to reining in inflation expectations and will ultimately serve as a net positive for the Indian equity market on a medium to longer term horizon.
Goldman expects Indian equity markets to outperform the Asian region over the next six months.
The US investment bank has a record for changing perceptions around India's possibilities as the world's fastest growing large economy after China.
In a report first published in 2001, Goldman Sachs stuck its neck out to trumpet India as a major economic force of the 21st century. A few years later, it predicted that the size of India's economy would overtake that of the US in 2042.
As recently as April, it cut its 2012 growth forecast for the country to 7.8 per cent from 8.7 per cent.
Now, however, India can aspire to join China, Indonesia, Malaysia and Taiwan in Goldman’s ‘overweight’ category. In the meantime, it can bask in the satisfaction of leaving "?underweight' laggards like Australia, Japan and Thailand behind.
Related reading: Indian inflation: interesting times, Lex India: How low can growth go?, beyondbrics Is India growing faster than China? beyondbrics
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