The easing cycle has begun, but the stance is unchanged. Markets haven’t been really excited by the Budget or the monetary policy outcome, as they were probably looking for a stance shift to accommodative and more announcements on system liquidity…
The market’s near-term disappointment is with respect to the absence of new liquidity measures. Our estimates indicate that the cumulative measures undertaken thus far may still fall short of making core liquidity turn positive, given ongoing seasonal currency in circulation increases and continued dollar sales by the Reserve Bank of India (RBI). The assurance on further measures as needed, including durable liquidity injections, will help.
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That said, the absence of ‘here and now’ new measures does create a window of uncertainty during what is peak busy season on credit, levying maximum pressure on lenders’ resources. Further, the important distinction between ‘sufficient’ liquidity and ‘surplus’ liquidity remains as yet unclarified. This may keep deposit rates under pressure for now. However, from the next quarter, as credit ‘lean’ season begins and core liquidity improves further, including from an expectedly hefty RBI dividend, the transmission process can commence in a more broad-based fashion. Drawing from this scenario, we will look for RBI announcing new ‘liquidity bridging’ measures between now and May.
What do you feel about using a flexible approach on rates rather than holding them until the 4% target is met?
The governor noted the flexibility embedded in the mandate when responding to evolving growth-inflation dynamics. To that extent, if the market needed clearer signals that an actual durable attainment of the exact 4% target is not required for monetary easing, then that was delivered. The current setup of slowing growth and inflation visibility towards the ‘4-handle’ may have invited the same reaction function from the previous regime as well. Alongside, there is an emphasis on improving data and analytics which, as with any other organization, could very well represent a fresh pair of eyes looking at the whole process.
How many more rate cuts do you think we can have this year?
With CPI (Consumer Price Index-based inflation) expected to average 4.2% for the next financial year, an April or, at worst, June cut may well be under consideration, provided the global environment allows for it.
Markets were expecting more on capex from the Budget whose target for FY25 was revised and ₹11.2 trillion estimated for the next fiscal. Do you feel the estimate will be met next year?
Public capex has been one of the drivers of economic growth experienced by India over the last couple of years. Capital expenditure by the government in a developing economy often helps to create public infrastructure such as transport, provisions of health and sanitation, education, etc., that has significant multiplier effects in the economy beyond the immediate spurring of demand created by the spend. However, the path of fiscal consolidation and the relative inflexibility of revenue expenditure items mean that, unlike the planned economy of the past decades, capital expenditure will have to be done by a mix of public and private sector investments.
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This is why the government has been pushing public-private participation in infrastructure to create an enabling environment for the private sector to invest in creating capital assets in a profitable manner. The key to spurring private capex is to boost end-household demand so that industries invest in expanding capacity to meet growing demand. We believe this Budget does a good job of attempting to jumpstart consumer demand across rural and urban India.
Do you feel this slowdown of growth to 6.0-6.5% is the new normal, or can India head back to the 8%-plus trajectory over the next few years?
Real GDP growth rates are both a function of inflation, and external and internal environments. All estimates point to India’s economy moving up further in the world order due to its faster-than-world average growth rate and our demographic dividend. A congenial external environment also plays a strong role in reported GDP growth. The last decade or so has seen multiple shocks from cataclysmic events such as covid or crises and conflicts in different parts of the world. This has had two impacts.
All estimates point to India’s economy moving up further in the world order due to its faster-than-world average growth rate and our demographic dividend.
Firstly, it has forced nations to allocate larger spending towards defence, which is an expenditure that doesn’t create any productive assets. Secondly, it has led to the reversal of the free trade dogma and a return to relative insularity and protectionism. This is reflected in slower world GDP growth rates as well. The forecast growth rate for India, therefore, should look at these levels relative to the rest of the world, and when one does that, we find that amongst the larger economies, we are still very much amongst the fastest-growing major economies.
Has the market priced in US president Donald Trump-induced disruptions to global trade, or do you feel more is to come?
It’s extremely difficult to predict what specific actions US president Trump will take during his time in office. However, the broad trend of insularism and protectionism and trying to regain jobs lost to China is likely to significantly inform the Republican administration’s actions. His previous term in office does offer a few lessons on what kinds of sectors or enterprises could face heat, and it’s only reasonable to assume that the significant majority in Capitol Hill allows Trump more flexibility to further his agenda with force. Markets will react appropriately to developments. I think these kinds of event risks serve to highlight to investors why they should seek the safety of broadly invested, well-run and efficiently managed portfolio investment options that the Indian mutual fund industry today offers savers nationwide.
In the given global and domestic macros picture, what is your strategy for investing—thematic, multi-asset approach or any other?
Looking at the current volatile market globally and macroeconomic scenario, a more suitable approach is to have an asset mix to diversify the risk and make the most from the various asset classes. Each asset class plays a unique role within your portfolio, providing potential growth, stability or inflation protection. Moreover, each of them moves differently during market cycles, which means that during any given period, there will be some winners and some losers. Combining these asset classes may lead to relatively stable portfolio returns.
A landmark study published in 1986 stated that asset allocation is the single most important decision that explains portfolio return variability, which is approximately 92% compared to security selection or market timing. Therefore, for moderately high risk-taking investors, a multi-asset allocation strategy is suitable from a risk-adjusted return perspective. However, an investor who has a higher risk tolerance level may consider investing in an equity fund that takes a market cap or sector-agnostic approach for long-term wealth creation. From an emerging opportunity standpoint, thematic strategies could provide higher alpha opportunities since they invest in new trends/megatrends and align with the structural enhancements and reforms implemented by the government.
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The ₹70 trillion Indian mutual fund industry offers investors a plethora of choices right from simple hybrid products that combine debt and equity; to multi-asset funds that offer equities, debt, precious metals, and international equities; to pure equity funds with differing levels of risk; to debt-oriented funds with negligible risk. Therefore, investors should make an investment decision based on their risk appetite and allocate based on their long-term and short-term goals. I feel it’s best to consult a regulated investment adviser or a certified mutual fund distributor to craft an investment portfolio that meets one’s unique needs.
Do you expect foreign portfolio investors’ (FPIs) approach to India to change after the RBI monetary policy committee announcement and Budget?
Diversified global emerging market funds have been seeing steady outflows, as data from fund flows data provider EPFR shows. Even China equity funds, which took in over $1 billion in the last week of January, posted only their third inflow since the second week of October.
Over the same period, India equity funds saw the week’s biggest outflow since the covid pandemic hit in Q1 2020. That said, in 2024, India was the third largest recipient of flows into non-US money market (debt) funds worldwide. So, India is effectively a market where one thing and its opposite can both freely exist simultaneously. Our equity markets are increasingly being anchored more by domestic savings, starting to reallocate away from fixed-income avenues such as small savings schemes into equity, while our debt markets are seeing a mix of local and international investors contribute to its deepening.
The good news is that the Indian markets are driven by domestic investors eager to allow the power of equities to compound over the long term to create meaningful wealth. Nowhere is this better represented than the rising inflows into systematic investment plans (SIPs) in the Indian mutual fund industry.
Margin pressures have surfaced in Q3 FY25, which at the bottom line level, has slowed the profitability growth. What’s your view of earnings and market returns?
If we see earnings from a long-term view, they tend to converge to nominal GDP growth. Over the last few years post-covid, large-cap earnings grew faster than nominal GDP, catching up with the underperformance in the decade earlier—the drivers were sectors like banking, telecom, etc., which went through a downcycle earlier. Over the next few years, we expect earnings to be broadly in line with nominal GDP. In terms of market returns, we are cautious in the near term, but in the long term, that should also converge to the nominal GDP of the country.
