As India steps into the fiscal year 2025, the economy finds itself at a critical juncture. The 6.7% real GDP growth in 1QFY25 marks a slowdown, the lowest in five quarters, signaling a mix of internal challenges and external headwinds. This deceleration highlights the complex dynamics shaping India’s economy, where consumption, investment, fiscal management, and sectoral performance converge to determine the path forward.
Indian Economy: Key Drivers of Growth
Private Consumption Expenditure: PCE exhibited strong growth at 7.4%, driven by robust consumer demand, particularly during the festive season. Increased disposable incomes and improved consumer confidence further bolstered spending. Sustained growth in PCE is critical to support overall GDP, making policy measures to enhance income and job creation essential.
Government Consumption Expenditure: A Modest Contraction GCE contracted by 0.2%, signalling reduced government spending on public services, infrastructure, and welfare programs. This decline poses risks to broader economic activity, including slower job creation and potential delays in long-term development projects.
Gross Capital Formation: Investment Momentum GCF grew by 7.1%, reflecting continued investment, although at a slower pace. Gross Fixed Capital Formation (GFCF) rose by 7.5%, with a focus on infrastructure and manufacturing investments, supported by initiatives such as Make in India.
State Fiscal Health: Surpluses vs. Deficits Five states, including Maharashtra and Odisha, reported fiscal surpluses, while several others, like Andhra Pradesh and Kerala, posted significant deficits. High deficits raise concerns over rising borrowing costs and the potential crowding out of infrastructure investments, which are crucial for sustained economic growth.
Indian Equity: Sectoral Performance and Market Trends
Banking Sector: Private banks faced challenges, including margin contraction and rising provisioning costs, while public sector banks saw mild margin compression due to better investment yields. The sector’s performance hinges on its ability to manage cost pressures and maintain credit growth.
Automobile Sector: OEMs posted a 10% YoY volume growth, led by a strong 11% rise in two-wheeler sales. Festive season demand and improved consumer sentiment are expected to sustain growth in the coming quarters.
Consumer Sector: Revenue growth in the consumer sector rose to 6% YoY, reflecting improving rural demand. The sector is likely to continue benefiting from rising rural incomes and government support, driving future consumption.
Oil & Gas: The oil & gas sector underperformed, with adjusted PAT 9% below estimates due to weak results from oil marketing companies (OMCs). Market volatility and global energy price fluctuations weighed on the sector’s performance.
Technology: Resilience Amid Global Uncertainty IT services grew 1.2% QoQ, maintaining solid performance despite global pressures on discretionary spending. The sector continues to benefit from its adaptability and steady demand.
Healthcare: Exceeding Expectations Healthcare companies outperformed, with EBITDA and PAT beating estimates by 6% each. This growth was driven by lower raw material costs and successful product launches, positioning the sector for continued growth.
FII & DII Flows: FIIs turned buyers for the third consecutive month of USD1.4b in Aug'24. DII inflows continue to remain strong at USD5.8b in Aug'24. FII inflows into Indian equities stood at USD 5.1 b in CY24YTD vs. inflows of USD 21.4 b in CY23. DII inflows into equities in CY24YTD continue to be strong at USD37b vs. USD 22.3 b in CY23.
Indian Debt: A Favourable Environment with Cautionary Risks
Inflation and Bond Yields: A Stabilising Backdrop Inflation in India has moderated, reaching its lowest levels in four years, which currently stands at 3.65% as of August 2024, largely due to easing food prices. This provides a favourable environment for debt investments, as lower inflation supports stable bond prices and reduces the need for aggressive interest rate hikes by the RBI.
Stable Economy: A Goldilocks Phase With GDP growth stabilising and improvements in fiscal and current account deficits, India is experiencing a balanced economic phase. This stability is conducive to confidence in debt instruments, providing a stable backdrop for bond investors.
Declining Yields: Capital Appreciation Potential Lower yields on 10-year bonds indicate increased demand for Indian debt, offering the potential for capital appreciation in existing bond holdings. Further declines in yields could boost bond prices, enhancing returns for debt investors.
Global Risks: Volatility Ahead While domestic factors remain favourable, global risks, including geopolitical tensions and tightening monetary policies, could introduce short-term volatility. Long-term debt investors should be cautious, but manageable risks lie ahead.
Intelligent Investor Notes
Equity Valuations: Over the past five years, the Nifty-50 has delivered 17% CAGR, driven by corporate earnings growth of 18%, with profits rising to INR 7.9t in FY24 from INR 3.5t in FY19. While earnings momentum is expected to continue, growth may moderate to ~15% over FY24-26. The Nifty P/E remains well within its 10-year average range and is expected to maintain this level going forward.
Investment approach: The equity outlook remains positive, supported by strong economic growth, capital expenditures, and potential rate cuts. Large-cap stocks are fairly valued, while mid- and small-caps are trading at higher valuations.
Opt for High-Yield Debt: For a more conservative approach, consider including high-yield debt in your portfolio to capitalise on the current interest rate cycle while maintaining balance and stability.
Focus on Selective Niche Opportunities: Take advantage of current market opportunities with intrinsic value in sectors benefiting from the improved capex cycle, such as manufacturing, infrastructure, and real estate.
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