Laborers work on a construction site for a new Rapid MetroRail station in Gurgaon, India, on Nov. 21.
The upgrade comes after Moody’s Investors Service Tuesday backed its “stable” outlook on India’s investment-grade credit rating.
“In India, we feel the worst of the policy issues are behind us, confidence in the new finance minister and his team is strong and, although India still has many difficult issues to deal with, things are improving at the margin,” Goldman said in a note to clients Thursday.
It forecasts India’s economic growth to accelerate from an expected 5.4% in 2012 to 7.2% in 2014, and remain high through 2015-2016.
India’s reform initiatives and changes in the government have created a sense of optimism among domestic investors for the first time in more than a year, the investment bank said. These developments have also lowered the risk of “policy missteps” in 2013, it added.
The current MSCI India Index valuation of 13.4 based on the expected earnings of its component companies is well below its five-year average of 14.9 times, Goldman said. This affords an attractive entry point into one of the “stronger structural growth stories” in the region.
“With structural issues being addressed and a cyclical recovery on the horizon, the equity market may bounce back strongly next year,” Goldman said in the note.
Goldman expects India’s 50-share Nifty stock index to reach 6,600 points by December next year. The index was at 5,785 in morning trade Thursday.
India has received the “lion’s share” of current-year foreign investment flows (about $19 billion) in Asia, Goldman said. The South Asian nation is also less affected by the near-term concerns of the U.S. “fiscal cliff,” compared with other markets in Asia, the house added.
Still, inflation, which has displayed some recent signs of cooling, continues to be the main risk in the near term, it added.