2014 was quite the year for the Indian financial markets. The Sensex has, so far, climbed 30% year to date and there seems to be no signs of stopping the surge. That being said, with the year coming to an end- let's see what we can expect in 2015 from a market outlook point of view.
Looking at the macroeconomics, 2015 should be a continuation of the 2nd half of 2014: strengthened GDP, falling inflation, a stable currency, and strong FII inflows. GDP can pick up to 6-7% from the current 5-6% levels. With interest rates kept high, we can expect inflation to remain low. However, the pressure to cut the repo rate from 8% will only grow over time and at some point, the RBI will succumb to pressure and lower the rates. This should propel GDP and the capital markets.
The capital markets should continue to do well. With a stable currency, provided that global growth does not stagnate significantly and commodity prices due not rise sharply, investors will continue to look to India as the ideal place to park their funds. There is absolutely no better scenario for a country to be in than to have rising GDP in tandem with falling and low inflation. It happens rarely, and when it does, the country's economy booms.
From a reform based standpoint, the government's laid out many reforms in 2014; 2015 will be the year for the proper implementation and execution of these reforms. Key areas of reform include implementing wide ranging, sweeping changes to banking, education, infrastructure, and addressing labour laws. Reforms that can have massive impacts but have been overlooked in the past include addressing nationwide healthcare reforms (easier access and better quality healthcare nationwide), a surge in female participation in the workplace (for example, by directly addressing the issue and making it vastly easier for women to gain equal employment opportunities across the country), sweeping labor law reforms (which would make it the "Make in India" motto a success by creating millions of manufacturing jobs), and eliminating bottlenecks that dissuade entrepreneurs from pursuing ambitious projects.
Looking at the Rupee, although it has slowly climbed from 60 to 62 since July, it is unlikely to depreciate against the dollar in 2015. The RBI will look to keep it within a comfortable range, trying to find a sweet spot to encourage exports (by not allowing it to appreciate) while not allowing it to depreciate to the point that it dissuades investors. By keeping it within a range of 60-62, consistency can be expected- which is exactly what both import and export based firms look for. Therefore, there is little downside risk with the currency.
There are talks that due to the US economy picking up, the US Fed might finally raise interest rates and allow the dollar to appreciate against other other currencies. However, that remains unlikely. The US economy dominates the global economy, and while the dollar is at its greatest position since the recession began, it is unlikely that the US government would look to hurt what it has spent so many resources to build up: a strong US manufacturing industry. And, just like India, the US is looking to ship its cars and other manufacturing goods at a blistering pace in 2015. A strong dollar hurts that proposition. Therefore, although the Fed will look to raise interest and look to implement quantitative easing, rest assured that it will make its moves carefully. Therefore, India does not need to worry about the US's economic policies hurting its economy.
Finally, we can expect investor awareness to grow in 2015. More and more retail investors and begin to take an active interest in the stock markets, a welcome sign for a country with only 2% of the population vested in the capital markets. Look for the stock markets to continue to climb in 2015 as consumer confidence remains high with a reform oriented government in place.
All in all, 2015 should be a fantastic year for India.