Faced with uncertainty over the economic reforms process under the new Congress-led government, global investment banking outfit Merrill Lynch has downgraded India to "market weight" category and said the near term disappointment could accelerate selling that has until recently been rather modest.
The Congress' win in the Indian elections cast a major cloud over the near term outlook for the equity market, it said adding, "We do not question Congress' reform credentials but rather those of its coalition partners."
Downgrading India from "over weight" to "market weight" category, Merrill Lynch Asia Pacific - India strategy report asked investors to cut exposure to the Indian stock market.
"Change in the government leaves the reforms process, fiscal and monetary situation, in question. Valuations are not compelling enough given the outlook for the risk premium and India remains overweight amongst international investors," it said.
The near term policy disappointment could accelerate selling that has until recently been rather modest. The public finances could come under pressure and asset sales become slow, placing upward pressure on rates, it said.
Merrill Lynch said the risk premium for Indian equities would rise and valuations are not compelling enough to sustain overweight position. After 118 per cent gain last year, the Sensex has declined by 15 per cent.
"We sense it would be vulnerable to further downslide whilst the issues above are worked through," it said.
The path of reforms is highly uncertain over the coming months. Although there have been soothing words from Congress, "we prefer to wait and see what the new government does over the coming months," it added.
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