Goldman Sachs upgrades India rating

* Indian equities likely to moderately outperform Asian region over six months

* Lowers GDP growth for FY11 by 10 bps to 7.7 percent

The U.S. investment bank said Indian equity markets may moderately outperform the Asian region on a six months basis as the price to earnings valuations for MSCI India index are just at 14 times forward earnings,it said in its note.

Goldman Sachs had held India at underweight for over a year based on inflation risks,concerns over valuation and policy tightening overhangs.

The latest move by the RBI to raise the repo rate by 50 basis points was a clear sign in our view that the central bank is vigilant in bringing down inflation expectations,Goldman said.

Despite the near-term weakness,the policy tightening was a necessary step to reigning in inflation expectations and would ultimately serve as a net positive for the Indian equity market on a medium to longer term horizon,it added.

The Reserve Bank India (RBI),which has raised rates 11 times since mid-March 2010,is expected to be nearing the end of its tightening cycle as the threat of a recession hangs over the global economy.

The investment bank also said that government reforms were showing traction citing the enhanced foreign investor limit for corporate debt,freeing petrol pricing and the recent draft released on land acquisition for industry.

EQUITY MARKETS

Among Asian equity markets,Goldman Sachs placed ‘Overweight’ rating on China,Indonesia,Malaysia and Taiwan; kept Korea,Hong Kong,Philippines,Singapore and India at ‘Marketweight’ and Australia,Japan and Thailand at ‘Underweight’.

We believe the downward earnings revision cycle is mostly done. We are therefore more confident that Indian equities are likely to keep pace with the broader regional index,warranting our neutral stance,it said.

India’s benchmark index Sensex was 18 percent down till date in 2011,while it fell by almost 5 percent in two consecutive trading sessions so far.

Goldman Sachs expects the broader 50-stock Nifty index September 2012 target at 6600. At 11:33 a.m.,the index was trading 2.61 percent down at 5075.25. It has named six stocks across sectors in its conviction list–Tata Steel ,Sobha Developers ,IndusInd Bank ,Oil & Natural Gas Corp. ,Hindustan Petroleum and Bosch Ltd. .

LOWER GDP GROWTH

The firm expects India’s GDP growth (on fiscal year basis) to slow to 7.3 percent in the current fiscal year from 7.5 percent previously.

It expects Asia except Japan to now grow at 7.7 percent in 2011,10 basis points lower than its earlier estimate of 7.8 percent. It lowered its estimate of GDP growth for world’s second largest economy China to 9.3 percent from 9.4 percent.

On a global basis,the investment bank has cut its GDP growth forecast for 2012 to 4.4 percent from 4.6 percent,while it lowered its expectation of GDP growth in the U.S. for 2011 to 1.7 percent from 1.8 percent.

We feel that a weaker US would have more of an impact on additional tightening than an actual decline in expected GDP growth,it said.