India’s long-term story continues to fascinate foreign investors, who are looking for bottom-up stock picks, feel Abhinav Khanna, head of equities, Citi India, and Angus Richardson, head of Pan Asian Cash Sales, Citigroup Global Markets Asia. They expect to see highest earnings growth in FY19 in low-base sectors like financials and healthcare and in commodity sectors like oil & gas and metals, they told Rajesh Mascarenhas on the sidelines of the Citi investors’ conference. Edited excerpts:What is your take on Indian fundamentals? What will be the drivers for India’s GDP growth in FY19 and FY20?Abhinav Khanna: India’s medium-to-long term economic fundamentals remain robust, albeit some temporary slowdown in 2017 owing to necessary big-ticket reforms. In fact, we expect GDP growth to bounce back to 7%-plus levels in Q3 as supply-side shocks related to demonetisation and GST disruption fade away. While consumption will continue to drive GDP growth in India going forward, we think some improvement in investments could further support growth. We expect 7% growth in FY19 versus 6.5% in FY18.Several FIIs have reduced their overweight positions on India in the past six months. What is your outlook?Angus Richardson: FIIs’ overweight position on India has reduced over the course of 2017 as per a Citi analysis although they are still moderately overweight on India. We are positive on India in the medium-term given the GDP growth expectations relative to emerging market peers and positive reform momentum.Will inflation be a big worry for India? How can inflation be tackled without harming growth?Abhinav Khanna: Inflation is always a risk in an emerging market like India — analysing the latest print, our economists highlighted that our preferred underlying measure for CPI that strips out one-offs, eased to 4.3% in Jan 2018, a second consecutive month of decline. Overall, we expect CPI inflation to average 4.6% in FY19 from the average 3.6% in FY2018 but it will likely peak by June 2018 before easing towards end of fiscal FY2019. Continued supply-side reforms in India can help tackle inflation without harming growth and given RBI’s focus on it, we think inflation/growth balance will be managed. Our economists think RBI will hold onto rates this year.Are foreign investors worried about the return of the long term capital gains tax?Angus Richardson: Foreign investors continue to like the long-term India story, and are still looking for bottomup stock picks, where they have comfort on valuations, expected earnings growth and management/ promoter quality. FII flow into India would depend on global liquidity conditions on which dollar trajectory and US inflation or bond outlook will have a role to play. Over the medium-term, India will remain relatively attractive to foreign investors. LTCG was not a total surprise as its introduction had been discussed and expected for some time. Also, several other countries, including EM peers, have some form of taxation on long-term capital gains, so India is not a complete outlier.Are India’s reforms and policies on the right track?Abhinav Khanna: The government has implemented a number of landmark reforms in recent years — benefits of GST and the Bankruptcy Code whose positive impact will be felt over the medium-term and initiatives on the digital and infrastructure front. A number of other positive reforms have been implemented and we feel that over the medium-term, India is on the right track.Will the rise in crude oil price have a major impact on the Indian economy?Angus Richardson: Crude price is a key risk for India, given its impact on the current account, fiscal account and inflation. A few reforms from the government, including fuel price deregulation etc, are steps in the right direction and our view is that crude prices are likely to correct from current levels by the second half of the year.Don’t you think market is still stretched at this point in time?Abhinav Khanna: We think the volatility is mostly global-driven — EM and DM equities have also seen volatile movements this month and have corrected. Valuations in India have come down a little post this correction but still remain relatively expensive at 1 standard deviation above long-term mean (17-18x one year forward multiples). We are positive on the market in the medium-term although we are somewhat cautious in the near-term — our Sensex target is 36,900 for December 2018 — single-digit upside from current levels.Were December quarter results better than estimated?Abhinav Khanna: December results were overall quite good — 20% earnings growth for BSE-100 companies and in aggregate, the results were largely in line with estimates although there were some big beats and misses. We expect the highest earnings growth in FY19 in lowbase sectors including financials and healthcare but also in commodity sectors like oil and gas and metals. The sectors we are most overweight on are financials, autos and oil and gas.