Implementation of the Seventh Pay Commission's recommendations is seen to act as another catalyst for consumption in India.
Global brokerage firm HSBC on Monday upgraded India to the 'overweight' status, citing improving domestic indicators and more realistic earnings expectations.
It has also raised its Sensex target for 2016-end to 28,500 from 26,000.
"We move India to overweight (from neutral)," HSBC said in a research note, adding that "India is a relatively defensive market (least driven by global factors) in an increasingly uncertain investment world".
According to HSBC, domestically, India is one of the most convincing growth stories.
GDP growth is accelerating, budget deficit has narrowed, high frequency data points are picking up, and the recent earnings season points to improvement in demand.
"We believe India equities deserve to trade at higher multiples than the historical average due to several reasons – improving macro position, relatively defensive characteristics in times of increasing risks to global growth, and decline in cost of equity," HSBC said.
The report noted that after a slow start in sowing, most crop categories with the exception of cotton and oilseeds are showing strong progress and this should help contain food inflation to some extent as well as increase rural purchasing power and income.
Moreover, implementation of the Seventh Pay Commission's recommendations is seen to act as another catalyst for consumption in India.
"We prefer consumption to investment in India as there are specific catalysts for consumption as we mentioned, while private capex, an important component of investment, remains muted," HSBC said.
Key risks to this view are poor monsoons, a sharp rise in inflation, slower-than-expected economic growth impacting the corporate business environment and earnings, and acute risk aversion in global markets.
Image: Devotees pay obeisance near the holy Sikh shrine of Golden Temple on the eve of Diwali festival in Amritsar. Photograph: Munish Sharma/Reuters. The image is used for representational purpose only.