Rama Krishna Sangem
The Reserve Bank of India’s (RBI) Financial Stability Report (FSR) (December 2024), released on Monday, gives cues on global economic growth with detailed analysis and outlook forecasts on India’s macro-economic stability, financial sector and corporate earnings. The underlying message from the bank is that the Indian economy is displaying steady growth against an uncertain global backdrop, says a MoneyControl story.
Globally, growth is steady with the battle against inflation (the topmost concern across economies) winding down without the risk of a major recession. But what one needs to watch out for is the risk from escalating geopolitical tensions, uncertainty about trade and industrial policies in the aftermath of major global elections, and potential tightening of financial conditions, which could drag global output lower from expected levels.
Emerging market economies, including India, need to brace for the impact of “global spillovers and growing uncertainty in trade policies and logistics disruptions” on their financial systems.
The FSR’s reference to India’s resilient financial system, underpinned by strong macroeconomic fundamentals and healthy balance sheets of banks and non-banks, is particularly comforting at a time when the global developed economies are seeing rising indebtedness.
Growth to bounce back
Despite a moderation in the real gross domestic product growth (y-o-y) to 6 percent in the first half of 2024-25 from 8.2 percent and 8.1 percent growth recorded during H1 and H2 of 2023-24 respectively, the RBI is confident that growth would bounce back in the ensuing two quarters. This it explains will be on the back of a “pick-up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions”.
The key uncertainty internally is that the rising frequency of extreme weather events (e.g., heat waves and unseasonal rains) continue to pose risks for food inflation dynamics. It is known that after falling until August 2024, the consumer price index (CPI) inflation reversed as food prices rose. The fall in the rupee versus the US dollar too poses risks of imported inflation, which could take a toll on India’s economy, points out Vijay Bhambwani in this article.
All these factors, along with the stellar performance of most asset classes, raise pertinent questions for investors in Indian markets. Will all assets, including real estate and gold, continue to offer robust rewards ahead, given that India is touted to be the fastest growing economy? Will equity markets bounce back and rise as was the case in the first six months of 2024? Or, is it time to be cautious?
Equities shined this year
Indeed, Indian equities outperformed emerging market peers in 2024 so far, with the MSCI India Index recording a return of 19.5 percent compared to 8.3 percent for MSCI Emerging Markets Index (MSCI-EMI) as on December 12, 2024. To be sure, equity markets have corrected. “Despite the recent correction, equity valuations remain elevated across metrics, such as trailing and forward price-to-earnings (P/E) ratios, market capitalisation-to-GDP and earnings yield,” says the FSR.
Is it then time for investors to temper expectations? “Bloated unrealistic expectations are birthed in frenzied bull markets,” says Larissa Fernand, MC Pro’s columnist on personal finance. In her column here, she points out that corporate earnings growth is coming off and valuations are high.
The FSR report too, rings bells of caution for equity investors. “Q2:2024-25 corporate results, however, indicate a slowdown in earnings as reflected in earnings per share (EPS) estimates,” it says. To justify the current valuations for all indices, the required earnings growth should exceed the expected earnings growth to forestall a large and abrupt market correction.
