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Regarding the current geopolitical situation in Pakistan and India, despite high tensions in the last few days, it now appears that further escalation is unlikely. Pakistan has announced that it will release the Indian fighter pilot captured after downing his jet and India has welcomed this gesture. For now, we will carefully watch developments but we expect to see de-escalation to continue. This conflict will likely see a political boost for Prime Minister Modi, since the surgical strikes against militia training sites in Pakistan would be viewed as a demonstration of strength and taken positively by nationalists.
Indian growth indicators, mainly consumption related, have been weaker so far this year, impacted by the NBFC liquidity issues last year and trailing higher oil prices affecting recent consumption on discretionary categories including autos. While CPI for January also eased down further to 2.05% yoy, on the back of the softer inflation data, the RBI reduced the repo rate to 6.25% and changed its policy stance from “calibrated tightening” to “neutral”.
However, capex growth has been accelerating and capacity utilization has also begun to improve, which should help growth accelerate from 2Q19 onwards. The India market has been one of the under-performing markets in Asia, although investors will likely remain in ‘wait and see’ mode until the election.