Indian equity markets continued to retrace from its peak since end September as both macro and micro economic variables took peddle of the acceleration foot. Real GDP growth which was above 8% for each of the 4 quarters in FY24, has decelerated to 6.7% in Q1FY25 and 5.4% in Q2FY25 (est 6.5%). This slowdown is led by weak investment growth and muted government spending in the wake of elections even as consumption has held well. We access growth to improve from here on but would still be 50 bps below street expectations of 7% yoy growth for FY25. Recently released high frequency indicators also reflect a mixed trend with CV sales subdued in Nov 2024 and contraction in air cargo traffic for the 4th consecutive month. At the same time, toll collections continue to be robust, PV sales growth is on an improving trend, PMIs are resilient and water reservoir levels are healthy. RBI has maintained policy rates at 6.5% with neutral stance and opted for CRR cut of 50 bps to ease system liquidity. Commentary from the regulator indicates that they are more worried on lingering inflation rather than growth at the moment and would be data dependent for further rate cuts possibly pushing out expectations of a cut by couple of months.

Recent quarterly earnings also depicted the visible slowdown in economic activity. Aggregate sales growth of private sector (non-government and non-financial companies) grew at 5.4% yoy (6.9% in previous quarter) and operating profit growth was also muted at 3.5% yoy. We expect street earnings growth would moderate to mid-single digit in FY25 and low double digit in FY26. Corporate commentary on festive demand is mixed with optimism on pick in rural demand due to good monsoon, high reservoir levels and increasing purchasing power whereas urban demand is marred by high inflation particularly in the mass end of the markets. Investment oriented companies are expecting pick up in ordering activity and improved execution in H2 which should bode well for the economy. India has always been a “ two step forward, one step back” kind of growth economy and hence investors should not be too perturbed with the current slowdown.

Valuations of the broader market continue to be higher than long term averages. While valuations of top 100 corporates are marginally higher than historical averages, small, mid and micro caps are quoting at marked higher multiples. Investor would be well advised to follow a disciplined asset allocation on the overall portfolio and prefer large caps via small and mid-caps in terms of equity allocation over the next few quarters.

Thank you.

Issuer(s) / Stock(s) / Sector(s) mentioned above are for the purpose of disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation. The fund manager(s) may or may not choose to hold the same, from time to time.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.