Indian Bulls Could See Fresh Recovery Pressures As Central Bank Trims Growth Forecast
The third-quarter growth is expected to come at 6.8%, down from 7.4% while the final quarter estimate was cut to 7.2% from 7.4%.
Indian bulls and mom-and-pop investors are poised for renewed pressures amid a recovery from the biggest correction in recent times as the Reserve Bank of India slashed its growth forecast for the year.
After a growth shocker in the second quarter of the current financial year, Governor Shaktikanta Das trimmed the GDP growth forecast for the full financial year to 6.6% from 7.2% estimate previously.
The third-quarter growth is expected to come at 6.8%, down from 7.4% while the final quarter estimate was cut to 7.2% from 7.4%, Das said in the latest monetary policy committee meeting.
Further, after maintaining the status quo on key rates, the Governor said that the headwinds from geo-political uncertainties, volatility in international commodity prices, and geo-economic fragmentation continue to pose risks to the outlook. To ease potential liquidity stress, the cash reserve ratio has been cut by 50 basis points to 4%.
The ongoing market rally is being led by the tailwinds of foreign investors turning buyers and the monetary stimulus provided by the RBI’s CRR cut, according to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services. "But the sustainability of the rally is likely to be constrained by the headwinds of the slowing economy."
The momentum in the US market is strong and is likely to remain strong in the run-up to the inauguration of the Trump presidency, thereby making the "bulls in the Indian markets on the defensive."
The market’s near-term reaction to the latest MPC decision is likely to be cautious, Rupak De, senior technical analyst at LKP Securities, said. Technically, after a decent rally in a short span, the Nifty appears poised for consolidation in the coming days, he said. "However, the short- to medium-term trend remains strong."
The RBI's initial projection of GDP growth was above the consensus, making the 60-bps downgrade seem significant, according to Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers. "However, given that the revision aligns with market recalibrations, it is unlikely to have a substantial impact on market sentiment."
If inflation remains sticky, the RBI may have limited room for rate cuts, further dampening sentiment, De said. CPI inflation is projected by the RBI at 4.8%, up from 4.5%, for fiscal 2025.
However, the 50 bps cut in CRR has triggered a technical breakout in the banking sector, De said. "PSU banks appear poised for a short-term rally," he said, adding that the "robust momentum" in the banking space is likely to fuel further upside in the broader market in the short to medium term.
Indian stock market weathered the recent storm led by the exodus of foreign investors. The domestic stocks saw an outflow of Rs 1.66 lakh crore from a record 38 consecutive sessions of exit. The benchmark NSE Nifty 50 and the 30-stock Sensex corrected over 11% each, from their recent peaks.
However, the key gauges have recovered by about 6.5% from their lows in November end. The mid- and smallcaps have seen a sharper surge, showing confidence of a comeback as the indices are at a record level.
The surge in the small companies reflects sentiment among retail investors, who have poured in nearly Rs 5 lakh crore into the market this year.
Global funds have returned to the domestic markets with the second largest single-day buying on Nov. 25, and have mopped up stocks worth Rs 6,900 crore since then.
Despite some deterioration, India’s GDP growth remains the strongest among major economies, providing a reassuring macroeconomic backdrop for long-term investors, Hajra said.
However, the weakening earnings growth has stretched trailing price-to-earnings ratios, making short- to medium-term investors more cautious, Hajra said.
"This is a bull market climbing all walls of worries," Vijayakumar said. "Therefore, it makes sense to remain invested in this market." Investors should prepare for high volatility starting early 2025 and partial profit booking and moving some money to fixed income can be thought of, he said.
