2025: A Year of Consolidation and Policy-Driven Growth

As we step into 2025, the Indian equity market is poised for a phase of consolidation, with policy-driven actions expected to be the key factor shaping investor sentiment. This follows a volatile yet rewarding 2024, where the Nifty delivered robust 12.5% returns (January–November 2024) amidst a broad-based rally across multiple sectors.

2024 Highlights: Broad-Based Rally with Sectoral Leadership
The year saw remarkable sectoral performances:

Defence (+62%), Healthcare (+34%), and Realty (+31%) led the pack.
Capital Goods (+28%), Auto (+27%), and IT (+24%) also posted stellar returns.
In contrast, FMCG started strong but tapered off in the latter half, delivering a modest 3.6% return, reflecting weak rural consumption. Banks underperformed with 8.9% returns, trailing the broader market despite strong fundamentals.

Mid and small caps continued to shine, outperforming large caps for the fourth time in five years, as investors gravitated towards high-growth companies and niche opportunities.

Global and Domestic Influences
Indian equities outpaced broader emerging markets, although US markets (S&P 500) delivered an impressive 28% return during the same period. Global events, from geopolitical tensions to elections in over 65 countries, had limited impact on market volatility.

In India, the initial market reaction to election results was subdued, but a united coalition restored confidence. Globally, the interest rate easing cycle commenced mid-year, with major economies like the US, UK, and Europe cutting rates on lower inflation expectations.

However, India refrained from rate cuts due to high food inflation and external uncertainties, including the US elections. Despite this, the Indian rupee remained resilient, depreciating just 2% YTD, outperforming other emerging market currencies.

Economic Moderation Amidst Fiscal Consolidation
Economic growth moderated in 2024, impacted by election-related slowdowns in Q2 and excess rains in Q3. Corporate earnings followed suit, with analysts trimming growth forecasts for FY25.

Domestic liquidity, however, remained a strong pillar. Record SIP inflows in November 2024 and a robust mutual fund industry, now managing an impressive INR 68.1 trillion AUM, underscore the growing financialization of savings.

2025 Outlook: Policy Actions in Focus
The foundation for 2025 appears strong, but much depends on key policy interventions:

Interest Rate Easing Cycle: Expected to begin in Q1 2025, potentially boosting growth across sectors.
Global Trade Policies: US tariff decisions will be critical, particularly for emerging markets.
Sectoral Opportunities in 2025
Capital Expenditure: Early signs of recovery are evident, with new defence and road sector orders announced in late 2024. Rising power demand and peak deficits should also drive investments in the power sector.
Private Capex: Healthy corporate balance sheets, strong cash flows, and improved capacity utilization are setting the stage for sustained private sector investment.
Real Estate: Lower inventories, better affordability, and expected interest rate cuts could further fuel growth.
Manufacturing: Regulatory support, global supply chain diversification, and India’s cost advantage position manufacturing as a key growth driver.

Flows and Valuations
FII flows, which turned negative towards the end of 2024, are expected to return as valuations correct and India’s weight in the EM Index normalizes. Meanwhile, domestic flows are likely to remain robust, driven by record SIP contributions and increasing retail participation.

Consolidation Year with a Growth Bias
While the first half of FY25 may witness subdued earnings, a recovery in the latter half is likely as macro conditions stabilize. With the Nifty trading near its long-term average valuations, 2025 offers a mix of consolidation and selective growth opportunities. Investors should remain vigilant, focusing on sectors poised to benefit from policy actions and structural tailwinds.

In summary, 2025 is set to be a pivotal year, laying the groundwork for long-term sustainable growth in Indian equity markets.

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Q3 FY25: A Crucial Turning Point for India’s Growth Story

India, the torchbearer of post-pandemic economic recovery among major economies, has hit a rough patch. The nation, which averaged 8.3% GDP growth over the last three years, delivered an underwhelming performance in Q2 FY25. The 5.4% GDP growth for the quarter, a 7-quarter low, marked the third consecutive decline, falling significantly short of expectations.

While the government and the Reserve Bank of India (RBI) remain optimistic, the slump has raised concerns about the sustainability of India’s growth trajectory. The Finance Minister recently called the Q2 GDP figures a “temporary blip,” and the RBI’s December bulletin pointed to promising high-frequency indicators for Q3. But can the upcoming quarter provide the promised respite?

Unpacking the Q2 Disappointment
A closer look at Q2 reveals several headwinds that dampened growth. Export weakness due to global challenges and subdued government spending weighed heavily. Election-related disruptions limited fiscal spending, with revenue expenditure growing by just 8.7% year-on-year and capital expenditure—critical for long-term growth—seeing a contraction.

Gross fixed capital formation grew by a modest 5.4%, with heavy monsoons curbing mining and quarrying activity. The manufacturing sector stumbled, recording just 2.2% growth, its slowest in five quarters, though services offered a silver lining with a robust 7.1% growth. Private consumption, a critical growth driver, held firm, growing by 6% on strong rural demand.

Glimmers of Hope: What Q3 Might Deliver
Encouragingly, rural consumption has remained resilient in Q3, buoyed by favorable monsoons. Indicators such as a spike in scooter sales and fuel consumption reflect robust rural activity. Urban demand, though tepid in October, improved in November, with passenger vehicle sales growing by 4.4%.

Government capital expenditure is expected to pick up pace as the fiscal year progresses. Private capital expenditure, however, remains uneven, with growth concentrated in renewable energy and similar sectors. Steel consumption rebounded in November, offering a glimmer of hope, but overall capex momentum is yet to take off decisively.

On the external front, trade dynamics remain a concern. November saw merchandise exports contract by 4.8%, while imports surged by 27%, resulting in a record trade deficit of $37.8 billion. Services exports, while growing at 22.3%, lagged behind the 27.9% rise in service imports, further widening the trade gap.

Despite these challenges, Q3 GDP is projected to recover to 6.8%, with a slight moderation to 6.5% in Q4, as per the Economic Activity Index.

Implications for Indian Equities
Indian stock markets find themselves at a crossroads. Globally, the economic slowdown in Europe, China’s competitive stimulus measures, and geopolitical tensions create an unfavorable backdrop. A stronger dollar has pushed the rupee to an all-time low, making imports costlier and dampening foreign investor sentiment.

Domestically, the Nifty 50 index faces technical challenges, hovering precariously above its 200-day moving average and forming a bearish head-and-shoulders pattern. Valuations, while more reasonable after recent corrections, still hinge on strong earnings growth.

The road ahead depends on a mix of factors. Monetary easing, anticipated early next year, could provide much-needed support to corporate earnings. If Q3 earnings reflect the improvements indicated by high-frequency data, it might offer a much-needed catalyst for market sentiment.

Conclusion
India’s economic story is at a critical juncture. While Q2 FY25 highlighted vulnerabilities, the resilience in rural demand and government capex offers a silver lining. The coming quarters will test the economy’s ability to navigate external pressures and domestic challenges. For equity markets, the wait for a fundamental revival continues, with hopes pinned on Q3 earnings and a potential shift in monetary policy.

The image added is for representation purposes only