Market Update

Equity markets were up 0.59 percent today despite further uncertainty surrounding US tariffs and weaker Indian GDP growth. This uncertainty is evident with the Indian VIX up 2.24 percent from the last close. Additionally, news about the US putting harsher tariffs on BRICs nations led to the rupee selling off to all-time lows of 84.75. Although the stock market opened down, equities improved throughout the day. Companies in construction, defense, and healthcare did well since GDP numbers showed those sectors as expansionary through the broader data contracted.

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Analysis

India’s Economy Could Use Some Good News Right Now

India’s growth rate slipped to 5.4 percent, the worst reading since 2022, in the most recent reported quarter. The growth rate came lower than the 7 percent expected by the RBI and Bloomberg economists. Now, the RBI more than ever is receiving flak for having overnight rates at 6.5 percent, which is putting a clamp on much-needed growth. Still, a top ICICI economist projects a December rate cut is highly unlikely.

Breaking down GDP. Mining contracted 0.1 percent, a tiny fraction of the 11.1 percent growth it experienced last year. Manufacturing only grew at 2.2 percent compared to a whopping 14.3 percent. Since last year, only the defense, financial services, and hospitality sectors have shown growth, a trend reflected in this year’s lackluster earnings. Meanwhile, industrial sectors, which rely more heavily on raw material costs and financing, have contracted. Inflation has squeezed margins, while high interest rates have made funding capital-intensive projects significantly more expensive.

RBI Decision Making. The RBI has strongly opposed early rate cuts, primarily due to persistent food inflation. The summer harvest was hindered by insufficient rainfall, leading to food shortages. Additionally, the structure of India’s inflation is a challenge, as food makes up half of the consumption basket, making external factors like weather events particularly difficult for the central bank to manage.

Numerous economists have argued that food is overweighted in the central bank’s measurement of inflation — moreover, restricting monetary policy can do very little to impact food inflation, which is largely driven by the monsoon season and import/export quotas put in place by the government.

The Indian government had also slashed projections for growth down to 6.5 to 7 percent growth for this quarter but the shockingly low print will lead to legislative pressure to reduce rates. Finance Minister Sitharaman already commented two weeks ago on how rates were too restrictive. The issue with a reactive rate cut in December is the fearful rhetoric it delivers to markets: people will interpret the cut as hasty due to a bad print amid high inflation.

The issue may not be the cost of credit but rather its availability. Bank loan growth has slowed to 11.5 percent year-on-year, down from 20 percent, due to tighter lending standards. These stricter requirements limit businesses' ability to expand and invest, which not only impacts them directly but also affects the broader economy by reducing job creation and consumption opportunities. While the government has not yet considered rolling back or reassessing these restrictions, it is possible that such a review could take place in the coming months if growth continues to stagnate. More likely, the RBI will communicate its readiness to cut rates through public statements, signaling that while prices are easing, it will remain restrictive until the end of 2024. A positive development for the RBI is that agricultural growth has increased to 3.5 percent, up from 2 percent last year, supported by above-average winter rainfall and increased seed sowing.

Government Spending has risen to 4.4 percent, recovering from contractions in the previous two quarters due to the election season. However, the pace of spending remains slower than in previous years, as state elections in key battlegrounds like Maharashtra stretched into Q2. With low growth, concerns are mounting, particularly regarding job creation. Joblessness was a major issue for the BJP during the general elections, and weaker corporate earnings and slowing growth will hinder the country’s ability to leverage its young population. While data is still limited, most analysts expect the trend of declining wages to continue, following a 0.5 percent year-on-year drop last quarter. This could further depress consumption, which accounts for 60 percent of GDP, as falling wages reduce household and business spending. The Ministry of Statistics reported a 6 percent year-on-year growth in private final consumption expenditure, down from 7.4 percent last quarter, with more detailed data expected later this week.

Gupshup

Macro

• India's factory activity slowed in November due to rising inflationary pressures, with the PMI slipping to 56.5 from 57.5 in October. Despite easing demand, business optimism remained strong, supported by robust overall performance.

• The Indian rupee fell to an all-time low of 84.7050 on Monday, driven by slowing economic growth and strong dollar demand in the non-deliverable forwards market. Weak corporate earnings, foreign equity outflows, and disappointing GDP data have compounded pressures on the currency. The decline raises expectations of potential rate cuts by the Reserve Bank of India.

• India's sugar production for October-November dropped 35.4 percent year-on-year to 2.79 million tons, as delayed operations in Maharashtra and Karnataka slowed the start of the crushing season. Lower output may prompt India, the world's second-largest sugar producer, to withhold export quotas, potentially boosting global prices. Uttar Pradesh, however, saw a smaller decline, with production down just 1 percent to 1.29 million tons.

• India will update its GDP base year to fiscal 2023, replacing the current base of fiscal 2012; this updated methodology in calculating economic data will better reflect the economy's structural changes and growth patterns. The revised series, expected by 2026, aims to incorporate newer data sources and account for shifts like the rise of digital platforms and the pandemic's economic impact.

• India’s slower-than-expected economic growth could add to the current weakness in stocks, with strategists predicting a potential correction. The NSE Nifty 50 Index is down 8 percent from its September high, as concerns over the economy and valuations lead to foreign investor pullbacks, including $2.6 billion in equity withdrawals last month. Nomura expects a 25 basis point rate cut by the Reserve Bank of India on Friday to help support growth.

Equities

• India has accused Volkswagen of evading $1.4 billion in taxes by misclassifying imported car components to pay lower duties. Authorities allege the automaker declared complete car kits as individual parts, subjecting them to lower tax rates of 5-15 percent instead of the 30-35 percent duty for kits. Volkswagen asserts compliance with local laws and is cooperating with the investigation.

• India is investigating three electric two-wheeler manufacturers—Hero Electric, Benling India, and Okinawa Autotech—for allegedly misusing government subsidies worth $35 million (₹2.97 billion rupees). Authorities claim the companies falsely claimed compliance with the guidelines of the FAME II subsidy program, designed to promote local EV production.

• Bangladesh seeks to renegotiate its power purchase agreement with Adani Group if a court does not cancel the deal, according to its power ministry. A court-ordered panel is reviewing the contract, with renegotiation or cancellation dependent on findings of anomalies or irregularities like corruption, Reuters reported.

Alts

• India and Italy are exploring collaboration in shipbuilding, the blue economy, and space technology, according to Italian Minister Adolfo Urso. Speaking in Mumbai, Urso emphasized the potential for a "Cotton Route" to rival China's "Silk Route," leveraging ports, logistics, and undersea data infrastructure to counter trade disruptions from the Ukraine conflict and ease pressure on the Suez Canal.

Policy

• India has abolished its windfall tax on crude oil, aviation fuel, petrol, and diesel exports, originally imposed in 2022 to capture profits from surging global oil prices. The decision follows a reassessment by the finance ministry amid declining crude prices.

• The Kremlin announced that plans are in progress for Russian President Vladimir Putin to visit India, though exact dates have not been finalized. According to reports, the visit is expected in early 2025 at the invitation of Prime Minister Narendra Modi.

See you Wednesday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.73 Indian Rupee