2) Money supply. We have long highlighted that weak monetary base growth is an excellent bullish sign for Indian equities on a one-year horizon, with average returns of 21% well above base case returns of 16%. Currently, monetary base growth is running at 4.4% yoy, in the weakest decile. When monetary policy is tight and begins to ease (monetary base growth picking up), Indian equities tend to oblige and rally hard.

3) Why twin deficits are good for equities. When the twin deficits (current account plus fiscal deficit) are high like now, something happens – policy reforms get enacted while valuations already reflect the grim situation. Prospective returns from these diabolical twin deficit levels are exceptionally good.

4) Good valuations, and lows in EBIT and ROE, a contrary signal. We estimate that ROEs and EBIT margins are in the lowest quintile in the last two decades and are likely to rise as prior under-investment, policy reforms, contained commodity prices from a slowing China, and increases in infrastructure spending kick in. We think both ROEs and EBITs are likely to proceed back up to long-term averages (19% and 16.5%, respectively). From current EV/EBITDA levels the expected 6-month forward return is around 15%, if history is a guide.

5) More reforms. Investors should expect a continued slew of reforms, project approvals and possibly a budget next April that also surprises positively, despite being the last likely budget before the next general election. This view is our conclusion from our meetings in Delhi, the PM's legacy issues and his linking economic growth and national security, the energetic team leading the reforms, and the optionality for the Congress in the next general election.

6) PE expansion, productivity enhancement, higher profit share of GDP, and stronger GDP growth. Over the longer term, we believe three main things drive equity returns. The Demi-Ashton ratio (people in their 40s to 20s) drives the PE multiple (and productivity); prior over-/under-investment and government policy drives the profit share of GDP; and working-age population growth is a key driver of nominal GDP growth (and property prices). All three drivers look great for India but problematic for China.

Eoin Treacy's view The initial optimism that followed Manmohan Singh's election victory gave way when policy stagnation became evident. This allowed the focus of attention to move to some of India's less attractive aspects such as corruption, a current account deficit, budget deficit and lack of infrastructure. Over the last month as bold policy initiatives have been announced, optimism has returned and the fundamental case for India has improved.

However last Friday's flash crash has introduced the spectre of extreme volatility which is understandably debilitating to sentiment. (Also see David's comments on Friday). The May 6 th 2010 flash crash resulted in a multi-month corrective phase for Wall Street and while the fundamental backdrop for India is more encouraging the risk of an additional period of consolidation cannot be ruled out.

The Nifty Index remains somewhat overbought relative to the 200-day MA and a clear upward dynamic would be required to question potential for a further reversion towards that mean.