Goldman downgrades Indian stocks to ‘underweight’

Goldman Sachs has downgraded its rating on Indian stocks to "underweight" on concerns about delayed growth recovery and rising vulnerabilities for the economy.

We downgrade Indian markets to 'underweight' and recommend investors to stay selective," the global investment bank said today, as recent activity data has been sluggish with no signs of a pick-up in investment demand.

The external funding environment has also become challenging, causing the Reserve Bank of India to tighten liquidity, the investment bank said in a note.

Goldman Sachs also expects corporate earnings to grow at 5 per cent for the current fiscal year and 11 per cent for the next year, below consensus estimates.

"We lower our NIFTY 12-month target to 6200, implying 7 per cent upside in local FX with potential downside risks from rupee weakness," it said. ''We see limited room for re-rating unless macro conditions turn favourable.''

Goldman Sachs favours export-facing sectors which may benefit from better external growth and weaker currency, and advises investors to avoid rate-sensitive and industrial sectors given cyclical pressure from rising rates and slower growth.

Goldman Sachs' idea of preferred stock includes Oil India Ltd, HCL Tech, ONGC, Bajaj Auto, Titan and Havells India.

The investment bank expects the rupee to remain under pressure and feels the RBI may keep liquidity tighter for the next 3-6 months.

The Indian currency has been under pressure largely on account of both external as well as internal factors related to twin deficit concerns. India economy is already weighed down with high current account deficit that hit a record 4.8 per cent of gross domestic product (GDP) in the fiscal year that ended in March.

Coupled with slowdown in growth and twin deficit concerns makes the rupee especially vulnerable as foreign investors retreat from emerging markets on expectations that the US Federal Reserve will soon begin winding down its ultra-loose monetary policy.

A high current account deficit is a key vulnerability for India, having risen from 1 per cent of GDP in FY07 to 4.8 per cent in FY13, says Goldman. The global investment bank expect India's current account to improve very gradually to 4.2 per cent in FY14 and 3.4 per cent in FY15.

The pressure on the rupee is likely to remain in place, if US rates continue to move higher and capital flows dry-up or potentially reverse thereby putting pressure on the current account, added the Goldman report.

Goldman Sachs forecast for the dollar/rupee remains at 60 for the year.