Global Headwinds Remain Despite Indian Equities Surviving The Worst: Goldman Sachs

The worst seems to be behind for Indian equity markets in terms of economic growth and earnings trajectory, but market volatility will likely remain high given global headwinds in the backdrop of reciprocal tariff from the US, Goldman Sachs said. Further, domestic positioning on small and midcap stocks will also impact volatility.

The NSE Nifty 50 has declined for five consecutive months. It has corrected about 14% from the September peak. The Nifty Midcap and Smallcap indices have corrected 20% from peak, with constituents of both down more than 20%, Goldman Sachs said.

In case US implements reciprocal tariffs, India will be significantly affected, Goldman Sachs said. The brokerages' team of economists estimated that the weighted average effective US tariff rate on Indian imports may rise by 6.5–11%. This will impact India's GDP growth by 0.1–0.3%, depending on the kind of reciprocal plan adopted.

India reported 6.4% GDP on a year-on-year basis in the fourth quarter of calendar year 2024, compared to a seven-quarter low of 5.6% in the preceding quarter. Private consumption growth supported the GDP recovery, the brokerage said.

India's GDP decline has bottomed out, according to economists at the brokerage. The recovery will be gradual from here on. High frequency indicators across various sectors showed buoyant rural activity in January. They see growth ranging between 6.6% and 7% in the next four quarters. It sees India's GDP growth for calendar year 2025 to be at 6.4% year-on-year.

The 40-basis-point budgeted fiscal consolidation suggests that peak drag growth from fiscal tightening is likely behind, even as the Indian government remains focused on fiscal consolidation, Goldman Sachs said.

The Reserve Bank of India delivered a 25-basis-point rate cut in February. It has announced several measures to ease the liquidity situation in the banking system. The measures are adequate rather than abundant, Goldman Sachs said. The liquidity management measures are helping in keeping the interbank rates around the policy rate. Overall, it indicates India's policy is now less restrictive.

Goldman Sachs cut earnings per share estimates for India Inc by one percentage point to 12% and 15% for calendar year 2025 and 2026. Meanwhile consensus expectation of EPS growth for CY25 has come down to 14% from 16% earlier.

"We expect earnings to stabilise in a couple of quarters," Goldman Sachs said.

The September quarter was the low point for India Inc. with accelerated pace of EPS cut, Goldman Sachs said. MSCI India CY24 witnessed 3% cuts during the result period.

After the recent correction in equities, MSCI India is trading at 21 times 12-month forward price-to-earnings ratios compared to 25 times in September. India's PE premium has fallen to 53% from 70% in September. Beyond the headline index, valuations moderated significantly across sectors.

However, Goldman Sachs notes that valuations still remain expensive for small and midcaps.