UBS Group AG has recommended that investors short the Indian rupee and adopt an underweight stance on Indian stocks. India's $4 trillion economy is entering a "structural slowdown", driven by weak credit growth, declining foreign direct investment, and a broader deceleration in the country's economic performance, UBS said.
The brokerage's research points to a number of factors driving the slowdown, which it argues cannot be attributed solely to cyclical factors like oil-price hikes or government spending cuts. One of the major worries is the significant reduction in FDI, which amounted to only around $3 billion in the past 12 months.
The “conventional wisdom that India is ‘far removed' from Trump risk compared to other emerging markets is debatable,” said Manik Narain, head of EM strategy research at UBS. “A potentially higher-for-longer US yield environment poses challenges to India's growth, with one of the highest debt service-to-revenue ratios in the major EM space.”
Adding to this, UBS warns that India's equity market, which has seen increased optimism in recent years, is now overvalued. Indian stocks are currently trading at a 72% premium, compared to other emerging markets, a significant increase from just a year ago. UBS highlights that this premium is unsustainable, given the broader economic challenges facing India, including slowing earnings growth, particularly in defensive sectors like consumer staples.
UBS also points out the challenges posed by a higher-for-longer US yield environment, which could complicate India's growth prospects. The country's high debt service-to-revenue ratio makes it particularly vulnerable to rising US yields. Additionally, India's bond market has experienced the fastest outflows since 2020, further signaling a decline in investor confidence.
Given these concerns, UBS has revised its outlook for India, advising investors to buy bearish rupee options, pricing in a further 2.6% depreciation of the Indian currency this year. The bank also suggests positioning through rate-receiver swaps to benefit from a potential 75 basis-point rate reduction.
UBS' analysis marks a bearish shift in the outlook for India's economic growth and stock market, suggesting that investors should tread carefully amid ongoing structural challenges.
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