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Time to Overweight India? Here's Why

Thomas Brown | Digital Vision | Getty Images

The Indian stock market has been one of the biggest laggards this year missing out on a global rally in equities, but some strategists are betting on a change in fortunes for the country's stocks, which have fallen 6 percent since the end of January.

Stocks have come under pressure on worries over Asia's third largest economy's growth trajectory and its government's precarious financial position. But Adrian Mowat, chief Asian and emerging market strategist at JPMorgan who is overweight Indian equities, told CNBC on Wednesday that he is "very bullish" on the market.

The central bank's easing bias and the government efforts to reign in the fiscal deficit are two of his reasons.

The Reserve Bank of India, which lowered interest rates for the second time this year on Tuesday, is expected to ease monetary policy further this year, with some economists forecasting up to 75 basis points of additional cuts. Lower financing costs help boost corporate profitability.

(Read More: India's Central Bank Cuts Key Interest Rate )

Worries around the country's fiscal deficit are subsiding as the government acts to reduce its expenditure through reducing subsidies on fuel, for example, Mowat said. The country's fiscal deficit is forecast to come in at 5.2 percent of gross domestic product (GDP) for the fiscal year ending March 31 2013, below the target of 5.3 percent and fall to 4.8 percent next year.

(Read More: Has India's Economy Turned a Corner? )

While India's growth picture looks grim at the moment, Sanjiv Duggal, investment director, equities at HSBC Global Asset Management believes it has bottomed out and will pick up from here.

After slowing to an estimated 5 percent in the current fiscal year, GDP growth is expected to tick up modestly in the new year to above 6 percent. However, this remains a far cry from the near-double-digit pace of expansion before the 2008 financial crisis.

"It's always good to buy when you have bad economic data...you are getting some attractive buys in the market," Duggal said, pointing to pro-growth sectors including consumer discretionary, materials, industrials and financials which he believes have been ignored by investors.

Will Reform Momentum Continue?

Strategists remain upbeat that the government will continue with the reform agenda it began last September, when it opened up key sectors of the economy, including retail, aviation and broadcast, to foreign investment.

"We expect the rare alignment of political and business interests in a pre-general election year to result in the continuance of economic reform in 2013," said Saurabh Mukherjea, head of equities at Ambit Capital.

Mowat of JPMorgan agrees the government will continue to focus on policy announcements to boost investor and corporate confidence.

(Read More: India Reassures on Reforms After Key Ally Quits )

According to Mukherjea, there is a lot of interest from foreign investors to deploy funds into India. "Foreign investors want to put money to work in India. New India specific funds, emerging market small cap funds have been raised, and that money will get deployed in India over the coming months," he said.

While JPMorgan and HSBC did not give an estimate of how much upside there was in Indian equities this year, Ambit Capital expects the benchmark Sensex to rise 15 percent from current levels in 2013.