Pratik Gupta: Market valuation restricts upside in the short term
defence and infrastructure plays also offer strong earnings growth prospects, but we find limited upside at current expensive valuations, which are pricing in all the good news. We expect the Union government to achieve a lower fiscal deficit of 5% in FY25.
Even if there are some minor concessions made to accommodate coalition partners’ demands, and some shortfall from divestments, we believe there is adequate cushion from the larger-than-expected RBI’s surplus transfer of ₹2.1 trillion. In addition, with real economic growth of 7% this year and strong GST/direct tax collections, as well as the likelihood of a good monsoon and stable global oil prices, we don’t see the risk of a fiscal slippage.
The US market is now expecting only one to two Federal Reserve rate cuts later this year, so we expect the Reserve Bank of India (RBI) to follow through as well in 2HFY25—especially as India’s inflation is on a downward trajectory and the government’s fiscal deficit is also coming down. We expect the repo rate to fall by 50 basis points (bps) to end FY25 at 6% and accordingly the 10-year bond yields also to soften a bit.
The current account deficit will likely increase slightly to 1.1% in FY25, but we also expect strong passive inflows from global bond index funds to support the rupee and RBI intervention to manage the currency volatility, hence we expect the INR/USD to remain stable at around the 83-level in FY25. India’s Nifty is trading at 21x FY25 P/E, which is one of the highest multiples in the last 20 years.
It is also expensive versus other emerging markets India's premium to the MSCI EM Index is now ~70% versus the historical range of 20-90% and the earnings-bond yield gap is not attractive. However, this is supported by
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