The recent market fluctuations can be attributed to a broader "market reset phase," a natural part of the economic cycle, as the market recalibrates from the exceptional growth experienced during FY21-24. Despite these near-term corrections, India's long-term resilience remains a pivotal factor in shaping our outlook, underscoring the nation's capacity to adapt and sustain returns.
The FY25-26 budget exemplifies India's proactive policy interventions, strategically prioritizing domestic manufacturing, rural development, and financial inclusion. Notably, the budget introduces significant personal income tax cuts aimed at bolstering middle-class spending power and stimulating private investment. The tax exemption threshold has been raised, and tax rates for higher income brackets have been reduced, measures expected to enhance household consumption, savings, and investment.
These policies not only support immediate recovery but also lay a robust foundation for sustained long-term growth. While near-term fundamentals may appear subdued, the economy's adaptability ensures that these strategic shifts translate into future opportunities.
Supply Chain Pressures and GDP Growth
Supply chain pressures have remained below historical averages, indicating improved efficiency in global logistics and manufacturing. This has helped stabilize input costs and maintain steady production cycles, reducing inflationary risks. A well-functioning supply chain is essential for sustaining economic growth, as it ensures that industries can operate without major disruptions, thereby supporting employment and business expansion.
The Economic Activity Index (EAI) nowcasts a seasonally adjusted GDP growth of 6.2% for Q3 2024-25, reflecting a robust economic expansion. This growth is primarily driven by industrial recovery, strong domestic demand, and policy-driven investments in infrastructure and manufacturing. Additionally, the easing of supply chain constraints has positively impacted key industries, particularly in automobile manufacturing, consumer goods, and technology, as companies can operate with better cost control and production efficiency. With stable economic policies and investment-friendly initiatives, India's growth trajectory remains optimistic despite global uncertainties.
Union Budget 2025-26: A Growth-Oriented Strategy
The Union Budget for 2025-26 is centered on stimulating economic growth through investment-led expansion, tax relief for the middle class, and fiscal consolidation. A major highlight is the increase in the tax-free income threshold from ₹700,000 to ₹1.2 million, which is expected to leave more disposable income in the hands of consumers. This measure is anticipated to boost spending across key sectors such as housing, automobiles, consumer durables, and discretionary goods, thereby accelerating domestic demand and economic activity.
To ensure long-term growth, the government has significantly increased capital expenditure to ₹11.2 trillion, focusing on large-scale infrastructure projects, including roads, railways, renewable energy, and urban development. This investment is expected to have a multiplier effect on employment generation and economic productivity. Additionally, policies aimed at enhancing agricultural productivity through increased credit availability and better logistics are set to strengthen rural incomes, further supporting economic expansion.
At the same time, the budget emphasizes fiscal discipline, targeting a fiscal deficit of 4.4% of GDP, down from 4.8% in the previous year. This commitment to reducing the deficit is crucial for maintaining macroeconomic stability, attracting foreign investment, and ensuring a sustainable economic path forward.
Fiscal Deficit and Debt Management
The government's decision to reduce the fiscal deficit to 4.4% of GDP signals a commitment to balancing growth with responsible fiscal management. A lower fiscal deficit helps maintain rupee stability, reduces inflationary risks, and lowers borrowing costs, making it easier to fund long-term infrastructure projects without excessive debt accumulation.
Higher capital expenditure has been prioritized over revenue expenditure, ensuring that public funds are directed toward productive assets that generate long-term economic benefits. Additionally, improved GST collections and direct tax revenue have provided the government with fiscal space to sustain its development agenda while maintaining financial discipline. By keeping inflation in check and ensuring a stable investment climate, these measures are expected to strengthen India's global economic standing and attract higher foreign direct investment (FDI).
Equity Market Outlook: Sectoral Trends & Market Consolidation
The Indian equity markets saw strong sectoral performance in 2024, with Healthcare emerging as the top performer with a 39% year-on-year (YoY) gain, driven by increased exports, demand for pharmaceuticals, and advancements in med-tech. The Real Estate sector also saw significant growth of 34% YoY, fueled by urban expansion, strong demand for residential properties, and government-led infrastructure initiatives. Meanwhile, the Auto sector recorded a 23% increase, benefiting from rising EV adoption and higher consumer demand, while the Technology sector grew by 22%, particularly in BFSI and cloud-driven transformation.
In the near term, markets are expected to remain in a consolidation phase as investors assess potential trade and fiscal policy actions by the U.S., along with fluctuations in Foreign Institutional Investor (FII) inflows. However, while short-term volatility may persist, it is largely sentiment-driven and does not change the strong long-term fundamentals of the Indian economy. Investors are advised to focus on quality stocks with sustainable earnings, emerging growth sectors, and value-based investment opportunities that align with India’s ongoing economic transformation.
Balancing Risk and Return: Portfolio Strategy for 2025
Given the current market conditions, a well-balanced investment approach is key to managing risk while capitalizing on long-term growth opportunities. The strategy involves actively managing portfolios, prioritizing investments in quality companies, and focusing on sectors poised for expansion. Companies with strong earnings growth, sound balance sheets, and attractive valuations should remain the core focus.
Additionally, a diversified allocation across multi-asset funds and equity savings funds can help mitigate short-term volatility while ensuring stable returns. These funds provide exposure to domestic equities, arbitrage strategies, and fixed-income instruments, offering a balanced risk-reward profile. By maintaining a disciplined approach to valuation and portfolio selection, investors can navigate market uncertainties effectively and position themselves for sustained wealth creation.
Fixed Income Market: Inflation Trends and Debt Strategies
Inflationary pressures have eased, with headline Consumer Price Index (CPI) inflation declining to 5.22% in December 2024, down from its peak of 6.2% in October 2024. This decline has been largely attributed to lower food prices, particularly in vegetables, pulses, and sugar, alongside stable energy costs. Lower inflation improves purchasing power and creates a stable environment for interest rates, making fixed-income investments more attractive.
The Indian debt market is expected to offer relatively stable but moderate yields, particularly for shorter-duration and investment-grade debt instruments. Investors looking for stable returns with lower risk exposure may find opportunities in high-quality corporate bonds, government securities, and debt mutual funds. A neutral policy stance by the RBI is expected to keep yields in check, ensuring a favorable outlook for fixed-income portfolios.
Conclusion: Positioning for Growth Amid Market Uncertainties
As 2025 unfolds, India's economy remains on a strong growth trajectory, supported by government-led investments, tax reforms, and a stable inflationary outlook. While short-term market volatility and global economic shifts may create temporary headwinds, the long-term fundamentals remain positive.
For investors, a disciplined approach to stock selection, valuation, and asset diversification is crucial to navigating these uncertain times. Maintaining exposure to high-quality equities, stable fixed-income instruments, and multi-asset funds can help balance risk and return. As the markets stabilize, those with a well-structured investment strategy will be best positioned to capitalise on emerging opportunities and drive long-term wealth creation.
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