The confluence of a strengthening US Dollar, hardening US bond yields and heightened geopolitical risks continue to exert pressure on emerging economies globally. Despite the resilience that the Indian economy has demonstrated so far, it has not been entirely immune to these headwinds. India’s GDP numbers of 6.2% till Q3 FY2025 have been lower as compared to the 9.2% and 7.6% growth seen in the past two years. The current tariff rates of 26% is likely to lead to some drawdowns in the country’s GDP. However, India seems largely cushioned as compared to peers owing to a lower share of exports in India’s overall economic output and exports (almost 20% of the exports to the US) that are exempt from tariffs. With India in the process of negotiating bilateral trade agreements with countries like the US and UK, we could witness the country gaining leverage.
Resilience, Slowdown or a Rebound?
Will India recover from a slowdown and rebound in 2025? With RBI cutting interest rates in February and then again in April, the economy has got the much-needed boost when it comes to consumption. Additional liquidity measures like Open Market Operations in two tranches during the month of March has added further impetus to liquidity. While the easing cycle is likely to drive bond yields lower, corporate bonds with higher credit quality are likely to yield a better spread owing to improving corporate earnings, driven by improving fundamentals.
India is the second largest consumer of crude and a strong supply of crude has been ensuring a subdued pricing of black gold, a trend that we are likely to witness over a 12-month horizon. This is advantage India as OPEC’s decision of unwinding some of its prior supply cuts is likely to exacerbate supply.
How do we position ourselves
We think that Indian equities will continue to outperform. As valuations have corrected across sectors, there’s additional comfort into buying into the small and mid-cap sectors, especially during market dips. Having said that, large cap stocks continue to provide the much-needed cushion in a volatile market like this one. A combination of factors like a boost in the consumption supported by a favorable monetary policy will support the country’s growth and earnings trajectory. The market has been largely fueled by domestic investors as opposed to foreign participation. Having said that, there has also been an increased FII participation in the markets during the months of March and April 2025 owing to multiple reasons including the 90-day halt on reciprocal tariffs and India’s positioning as an appealing investment destination.
Deploying market-neutral strategies and investing in assets like gold and silver act as a hedge against inflationary pressures. Additionally, diversification strategies across asset classes that have a lower correlation with traditional asset classes can help lower downside risks. With multiple options to invest in alternatives, offshore funds and private equity, today’s investor is spoilt for choice. Having said that, it’s essential to ensure that investments are the ‘right fit’ for investors – when it comes to investing, there never a ‘one size fits all’ solution.
Overall, we expect markets to see heightened volatility in the near-term given downside risks to growth and earnings outlook amid weakened sentiment towards risk assets. Nevertheless, we believe investor focus will shift to domestic fundamentals – Q4 earnings and RBI’s policy actions, both expected to be a positive driver for Indian assets. We remain Overweight Equities and look at buying opportunities during market dips.
