This is due to global (weaker growth) and local factors (softness in public capex)
This is due to global (weaker growth) and local factors (softness in public capex)

The growth momentum of the first three quarters of FY24 is expected to continue as cyclical recovery and structural improvements remain in play, UBS said in a report.

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“That said, the current global conditions may cause growth to moderate. Even after factoring in any slowdown, we believe India could still deliver 7 per cent growth in FY2025,” per an assessment by Premal Kamdar, Analyst, UBS Securities India.

The analyst noted that India’s GDP growth has been positively surprising , averaging above 8 per cent in the first three quarters of FY2024.

“We believe that India is likely to remain one of the fastest growing global economies. However, we expect GDP growth to moderate due to global (weaker growth) and local factors (softness in public capex). From 7.6 per cent y-o-y growth in FY24E, we expect real GDP growth to moderate to 7 per cent and 6.8 per cent in FY25 and FY26 respectively,” Kamdar said.

Sector-wise, some moderation is expected in investment-led growth due to lower public capex, while a gradual recovery is seen in consumption growth driven by a recovery in rural growth on expectations of a normal monsoon (as projected by IMD).

“We believe India offers the best structural growth story among other large economies. Combined with political stability and supportive government policies, India remains in a favourable position and is most preferred in our Asia ex-Japan asset class preferences among equities,” Kamdar said.

Equity market

While the Indian equity market is expected to remain volatile in the near term as geopolitical and economic risks remain elevated, the analyst believes downside risks are manageable amid a supportive domestic macro and micro environment. Additionally, the reversal of the rate cycle could be valuation supportive as the equity risk premium falls.

Kamdar recommended that investors use any steep market corrections as buying opportunities, preferring domestic economy linked sectors as they should benefit from India’s superior economic growth, given the long-term structural growth opportunities.

Fixed income

The analyst believes the beginning of the rate cut cycle will also be positive for fixed income markets and sees a good opportunity to add duration.

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“Within fixed income, we believe Indian bond yields will likely remain range bound in the near term. Given the flatness of the yield curve, medium- to long-duration bonds appear attractive as the elevated levels offer good carry with duration over the next 12 months, in our view,” Kamdar said.

Rupee

The analyst expects the INR to remain resilient, supported by a stable external deficit and rising forex reserves.

“We expect the INR to strengthen against the USD (US Dollar), supported by an improving trade balance, healthy forex reserves, stable oil prices and anticipation of FPI inflows in debt (supported by index inclusion) and equities (on reversal of interest rate cycle),” Kamdar said.