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2025: A Year of Consolidation and Policy-Driven Growth
Business, Equities, Market News, Markets - December 30, 2024

2025: A Year of Consolidation and Policy-Driven Growth

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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GDP likely grew by a median 6.3% in Q3, slightly higher than RBI’s 6.2% estimate
Business, Equities, Market News, Markets - December 27, 2024

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

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.

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ECB Closes the Door: What It Means for Asset Management M&A
Business, Equities, Market News, Markets - December 24, 2024

Bank Deposit Rates Unlikely to Decline Amid Strong Loan Demand

Bank Deposit Rates Unlikely to Decline Amid Strong Loan Demand

Bank deposit interest rates in India are expected to remain steady through the remainder of FY25 as banks grapple with heightened credit demand and tighter liquidity conditions. Despite a recent cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI), lenders are unlikely to lower deposit rates significantly, given the need to mobilize funds for a seasonally strong credit demand in the fourth quarter.

CRR Cut Offers Limited Relief
The RBI’s reduction in the CRR by 50 basis points earlier this month released an estimated ₹1.16 lakh crore into the banking system, temporarily easing liquidity pressures. However, this move is insufficient to offset broader systemic liquidity challenges. “While system liquidity is likely to continue to be in deficit in December 2024, the recent CRR cut by the RBI should provide some relief. Deposit rates are unlikely to show a material decline as the busy credit season lies ahead,” noted Karan Gupta, Director – Financial Institutions at India Ratings.

Liquidity Challenges Persist
As of mid-December, the banking system’s liquidity situation has deteriorated significantly. Liquidity swung from an average surplus of ₹25,000 crore in early December to a deficit of ₹1.11 lakh crore by December 16. This steep decline was largely attributed to quarterly advance tax payments by corporates, which drained liquidity from the system. The persistent deficit is expected to keep short-term rates elevated, with experts noting an increase of 5-10 basis points in short-term borrowing costs compared to early December levels.

Deposit Growth Matches Credit Growth
On the deposit side, growth has finally converged with credit growth, both clocking an annual increase of 10.6% and 10.7%, respectively, as of November 29. This convergence is a positive development for the banking system, as it alleviates the earlier mismatch between credit expansion and deposit mobilization. Nonetheless, maintaining this balance is critical, especially during periods of heightened loan demand.

Credit Demand Peaks in Q4
Traditionally, the fourth quarter sees a surge in credit demand driven by working capital requirements and seasonal business needs. This year is no different, with the banking system reporting a year-on-year credit growth of 10.6% as of November-end. Although this is a moderation from the double-digit growth observed earlier in FY25, the demand remains robust enough to exert pressure on banks to sustain elevated deposit rates to attract funds.

Marginal Impact on Bank Margins
The CRR cut has a nuanced impact on bank profitability. According to Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India, “The reduction in CRR may not mathematically translate to any change in deposits and lending rates. However, it may have a positive impact on margins of 3-4 basis points for banks.” This modest improvement in margins provides some relief but does not fundamentally alter the funding cost dynamics for banks.

Rising Reliance on High-Cost Funding
To meet funding requirements, banks have intensified their efforts to attract deposits by offering higher term deposit rates. Additionally, many lenders have turned to certificates of deposit (CDs), a relatively costlier funding avenue, to bridge liquidity gaps. “Deposits have remained prominent in FY25 as banks have intensified efforts to strengthen their liability franchise and have offered higher term deposit rates,” said Sanjay Agarwal, Senior Director at CARE Ratings. “The banks are additionally obtaining funds through certificates of deposit, albeit at a comparatively higher expense.”

Funding Conditions to Remain Tight
Experts broadly agree that funding conditions for banks will remain tight in the foreseeable future. While deposit rates have likely peaked, they are expected to stay elevated as banks compete to secure funds amid volatile liquidity conditions and strong credit demand. The need to maintain an adequate liability base to support credit growth means that any reduction in deposit rates is unlikely before the end of FY25.

Implications for Borrowers and Depositors
For borrowers, the stable to marginally higher interest rate environment could mean higher borrowing costs, especially for short-term credit facilities. On the other hand, depositors stand to benefit from attractive term deposit rates, as banks continue to offer competitive returns to secure funds.

Outlook for FY26
As we approach the end of FY25, the outlook for FY26 hinges on several factors, including RBI’s monetary policy stance, global interest rate trends, and domestic economic conditions. If liquidity conditions improve and credit growth stabilizes, there may be room for banks to reassess deposit rates. However, the current environment suggests that deposit rates will remain a focal point for banks to navigate through the immediate challenges.

In summary, while the CRR cut has provided temporary relief, the interplay of strong credit demand, volatile liquidity conditions, and external pressures will likely keep deposit rates elevated in the near term. Banks will need to carefully manage their funding strategies to sustain growth and profitability in this challenging environment.

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RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - December 13, 2023

Policy watch: RBI holds rates, Moderates growth forecast for 2024

Policy watch: RBI holds rates, Moderates growth forecast for 2024
Introduction:

The Reserve Bank of India (RBI) has concluded its latest monetary policy review with a cautious yet optimistic stance as the country prepares to welcome the New Year. The central bank, while remaining vigilant to emerging economic challenges, has taken steps to support growth and maintain stability in the financial system. This report provides an overview of the key highlights from the recent RBI policy announcement and analyses the potential implications for the Indian economy in the coming year.

As the global economic landscape continues to evolve amid ongoing uncertainties, central banks play a crucial role in shaping monetary policies that balance growth objectives with inflation control. The RBI, in its recent policy review, has demonstrated a nuanced approach that seeks to address the challenges faced by the Indian economy while fostering a positive outlook for the upcoming year.

Key Highlights of the RBI Policy:

 Repo Rate Unchanged at 5.9%: The RBI has decided to keep the repo rate unchanged at 5.9%, signalling a steady approach to monetary policy. This move aims to provide stability to the financial markets while supporting economic recovery.
 Policy Stance remains “Withdrawal of Accommodation”: The central bank has maintained its policy stance, signalling a commitment to gradually withdrawing accommodative measures. This decision suggests a cautious approach, balancing the need for economic support with concerns about potential inflationary pressures.
 Inflation Projected to Moderate to 4% in Q4 FY24: The RBI’s inflation outlook anticipates a moderation to 4% in the fourth quarter of the fiscal year 2023-24. This projection reflects the central bank’s attention to inflation dynamics and its efforts to ensure price stability in the economy.
 Growth Forecast Revised Downward to 6.8% for FY24: In response to evolving economic conditions, the RBI has revised its growth forecast downward to 6.8% for the fiscal year 2023-24. This adjustment acknowledges the challenges faced by the economy while providing transparency about the central bank’s expectations.
 Focus on Maintaining Financial Stability: The policy highlights underscore the RBI’s commitment to maintaining financial stability. This includes efforts to strengthen regulatory frameworks, enhance risk management practices, and ensure the resilience of the financial system in the face of potential disruptions.
 RBI to Remain Vigilant and Monitor Evolving Economic Situation: The central bank has reiterated its commitment to vigilance, emphasizing its role in closely monitoring the evolving economic situation. This proactive stance indicates a readiness to respond to changing conditions, ensuring that policy measures remain adaptable to emerging challenges.

Market Reaction:

The Indian stock market initially reacted positively to the policy announcement, with the benchmark BSE Sensex index rising over 2%. However, the gains were short-lived, and the market ended the day flat.

RBI’s Stance on Liquidity and Market Impact:

Despite refraining from introducing fresh liquidity measures, the Reserve Bank of India (RBI) has emphasized its agility in liquidity management and maintained the possibility of utilizing policy tools like Open Market Operations (OMO) Sales. The absence of unexpected announcements led to a firming of the 10-year sovereign bond yield, reaching 7.26%, while the equity markets closed just below the 21,000 marks.

The central bank’s decision to hold off on new liquidity measures signals a measured approach, suggesting a current satisfaction with prevailing market conditions. However, the emphasis on nimble liquidity management underscores the RBI’s preparedness to adapt to changing economic circumstances. The mention of OMO Sales being “not off the table” implies that the central bank retains flexibility, ready to deploy additional measures when warranted.

The market response was notable, with the 10-year sovereign bond yield experiencing upward pressure, indicating a revaluation by investors in light of the absence of immediate liquidity injections. Concurrently, equity markets closed marginally below 21,000, reflecting a cautious sentiment among market participants. The reactions suggest that investors are carefully assessing the implications of the RBI’s decision and its potential impact on economic and market conditions.

Conclusion:

In conclusion, the RBI’s recent monetary policy review strikes a careful balance between supporting economic recovery and addressing inflation concerns. Maintaining the repo rate at 5.9% provides stability, while the decision to withdraw accommodative measures reflects a cautious approach. The downward revision of the growth forecast to 6.8% acknowledges economic challenges.
Market reactions indicate investor scrutiny, with a brief surge followed by a flat close. The RBI’s commitment to financial stability and its readiness to deploy liquidity measures position the economy for resilience. As India enters the New Year, the central bank’s nuanced stance sets the stage for stability and growth amid evolving economic conditions.

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RBI Charts Course for Sustainable Growth: Inflation Control as the Key

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Interest Payment Burden to reduce in FY26
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - December 8, 2023

RBI Charts Course for Sustainable Growth: Inflation Control as the Key

RBI Charts Course for Sustainable Growth: Inflation Control as the Key

Introduction:

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) conducted its review on December 2023-2024, assessing both global and domestic economic conditions. The committee made decisions pertaining to key interest rates and provided insights into the outlook for the economy.

KEY DECISIONS:

In response to the prevailing and evolving macroeconomic conditions, the Monetary Policy Committee (MPC) convened on December 8, 2023, and arrived at several key decisions. The committee opted to maintain the policy repo rate at 6.50 percent within the liquidity adjustment facility (LAF). Additionally, the standing deposit facility (SDF) rate was held steady at 6.25 percent, while both the marginal standing facility (MSF) rate and the Bank Rate remained unchanged at 6.75 percent.

The MPC’s strategic focus is on gradually eliminating accommodation to ensure that inflation steadily approaches the set target. At the same time, the committee intends to offer the essential assistance for economic growth. These actions are consistent with the broader goal of meeting the medium-term target for Consumer Price Index (CPI) inflation, which is set at 4% within a +/-2% band, and thereby contributing to the development of sustainable growth.

GLOBAL ECONOMIC LANDSCAPE:

1. Global Growth: The committee acknowledged a varied deceleration in global growth among economies.
2. Inflation: Global inflation showed a downward trend but remained above target levels, with persistent underlying inflationary pressures.
3. Market Sentiments: Positive developments were noted since the previous MPC meeting, marked by declining sovereign bond yields, US dollar depreciation, and strengthened global equity markets. However, emerging market economies faced ongoing challenges with volatile capital flows.

DOMESTIC ECONOMIC OVERVIEW:

1. Economic Resilience: The domestic economy demonstrated resilience, evidenced by a robust 7.6 percent year-on-year growth in real GDP in Q2:2023-24. This growth was supported by strong investment and government consumption, mitigating the impact of net external demand.
2. Prospects for Consumption and Investment: Continued strength in manufacturing, buoyant construction, and a gradual rural sector recovery are anticipated to brighten household consumption prospects. Healthy balance sheets of banks and corporates, normalized supply chains, and rising public and private capital expenditure are expected to bolster future investments.
3. GDP Growth Projection: Taking into account various factors, the MPC projected real GDP growth for 2023-24 at 7.0 percent, with Q3 at 6.5 percent and Q4 at 6.0 percent. Projections for Q1:2024-25 are 6.7 percent, Q2 at 6.5 percent, and Q3 at 6.4 percent, with risks evenly balanced.

INFLATION OUTLOOK:

1. CPI Inflation: Headline inflation fell to 4.9 percent in October 2023 due to corrections in vegetable prices, fuel deflation, and broad-based moderation in core inflation. Risks include uncertainties in food prices, base effects, and volatile crude oil prices.
2. Inflation Projection: CPI inflation is projected at 5.4 percent for 2023-24, with Q3 at 5.6 percent and Q4 at 5.2 percent. Q1:2024-25 is expected at 5.2 percent, Q2 at 4.0 percent, and Q3 at 4.7 percent, with risks evenly balanced.

MPC DECISIONS AND RESOLUTIONS:

1. Policy Rates: The MPC unanimously voted to keep the policy repo rate unchanged at 6.50 percent.
2. Focus on Inflation Alignment: The majority of the MPC expressed commitment to withdrawing accommodation to align inflation progressively to the target while supporting growth. One member, Prof. Jayanth R. Varma, expressed reservations on this aspect.

FORWARD GUIDANCE:

The MPC emphasized the need for sustained disinflation, monitoring food price pressures, and remaining vigilant to potential challenges in crude oil prices and financial markets. The current policy stance is actively disinflationary, with preparedness for timely policy actions if warranted.

CONCLUSION:

In conclusion, the RBI’s Monetary Policy Review for December 23-24 reflects a cautious approach, balancing the need for inflation control with support for economic growth amidst a dynamic global and domestic environment.

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Beyond boundaries: G20 Influence elevates Indian markets to new peaks

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Optimism in the Air: How RBI's Actions are Driving Market Momentum
Business, Expert Views - July 11, 2022

RBI expects Inflation to cool from October.

RBI expects inflation to cool from October:

Inflation in India is expected to slow down from October. The Central bank will minimize its aggressive action to cut down inflation, as per Governor Das.

As per RBI governor Shaktikanta Das, global factors should have more consideration while assessing inflation targets and current developments in Europe. The governor was focused on the importance of monetary policy. It will help in reducing inflation and inflation targets, despite fears that policy tightening could crease economic growth. He also added, after controlling inflation in the second half, there are chances of recession in India.

The Central bank on Friday eased its monetary policy to increase foreign investment and lift foreign exchange reserves. In India, inflation is above RBI’s target since the start of the year. This affected a hike in interest rates by 90 basis points in the last 2 months. All the central banks have been fighting against inflation driven by surging commodity prices, the Russia-Ukraine war, and supply chain disruptions. In June, RBI said expected inflation was at 6.7% and will cool down from October.

The impact of global factors on the domestic economy has increased over past years due to pandemics and war. So there should be greater recognition of global factors in local inflation and economic growth. This requires more coordination among countries to tackle problems. As per International Monetary Fund’s Latest projections, around 77% of countries have reported an increase in inflation, and this number could reach up to 90% in 2022.

Conclusion:

RBI governor suggested that not all tightening sessions have ended in recession.  He even mentioned that these measures won’t last long. The Central Bank and other major banks have revised GDP projections. It indicates a loss of pace in the growth of the economy rather than loss of a level. RBI governor mentioned many times that RBI plans to bring down inflation to 4% with a sensible slowdown in the economy. Inflation has also raised concerns about whether monetary tightening will end in a global recession or if there can be a soft landing. Global factors have difficult policy alternatives between price stability and economic activity.

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