GDP numbers augur well: Financial Express 31st May 2025

 The National Statistics Office’s (NSO) estimates on GDP for FY25, at 6.5%, are the same as the second advance estimates and hence does credit to its forecasting skills. Thus, there are no surprises for the market, and it will be business as usual. The NSO’s accuracy in forecasts need to be commended given that the exercise is quite mammoth due to the considerably large unorganised sector in the economy.

The internals for the year as well as the fourth quarter are quite impressive, especially as the last quarter has posited growth of 7.4%. All through the year, various high-frequency indicators such as goods and services tax collections, e-way bill issuances, purchasing managers’ index, and export of services have been sending very positive signals. The high base effect of 9.2% growth in FY24 was supposed to bring down the rate, so 6.5% is an impressive number.

Agriculture has been the big winner with growth of 4.6%, which suggests a good monsoon resulting in a stable kharif crop followed by a similar rabi crop can keep the rural economy ticking. In fact, this is a necessary condition for attaining sustainable growth over a longer period. As the monsoon forecast for FY26 is positive, indications are that rural consumption should continue to tick this year. This would be the supply side of the sector, and given the increase in minimum support price across the board for the kharif season — it will probably be replicated for rabi crops — higher output should result in higher income for farmers.

Manufacturing, however, has been the only segment that has registered relatively much lower growth than the previous year. Growth at 4.5% comes over 12.3%, so there is a big base effect. But it is also known that corporate profits have been under pressure this year due to demand-side factors. In fact, the manufacturing story is quite skewed with infra-oriented industries like steel, cement, engineering, and energy faring well while consumer-oriented ones delivered a mixed performance. High inflation has been the main factor militating against demand. With households spending more on food items, there is less money left for discretionary spending. Thus, the fast-moving consumer goods sector has been particularly affected. This will need monitoring in FY26. Revival of consumption is expected with the government’s fiscal incentives on the tax front.

Related to the slower growth in manufacturing is the slight decline in the gross fixed capital formation rate at current prices from 30.4% to 29.9%. Here too, investments made by companies have been rather narrow-based with industries like power, steel, and cement showing an increase in the face of good demand. Thus, both manufacturing growth and capital formation will be inexorably linked in FY26.

The construction sector has been one of the drivers of growth — it reflects both the contribution of housing as well as the government push on capex. The housing sector has gone through difficult times with interest rates being high over the last two years. There was an uptick in premium houses while the middle class stayed away. Government spending on roads, bridges, and irrigation works has been the major drivers of construction, which has kept growth ticking. Given the spare capacity, there is immense potential to expand construction in India. This trend may be expected to prevail in FY26.

The services sector has registered growth of 7.2% against 9% last year. The trade, transport, hotels, and communication segment has grown by 6.1%, which does not adequately capture the high level of spending by people on “services experience”. There has been a spike in spending on travel tourism and experiences, which should have resulted in higher growth in the segment. Financial services and real estate also registered lower growth of 7.2% on a high 10.3%, mainly due to the slow growth in deposits and credit in FY25. The movement of savings to the capital markets did come in the way of deposit growth. Public administration and other services maintained 8.9% growth with both the Centre and states meeting revenue budgets.

The fact that the Indian economy clocked growth of 6.5% over 9.2% (FY24) reflects a rather strong foundation. This would provide sufficient buffers to counter the global uncertainty building up periodically. Being a largely domestic-oriented economy, maintaining growth in the region of 6.5% would not be a problem. The challenge would be to move to the 7%-plus territory.

For that to happen, the demand side must be worked out. So far, the focus has been on the supply side, where the Reserve Bank of India has been lowering rates to push up investment. But investment is a result of higher capacity utilisation rates that can be achieved only when consumption increases and companies need to infuse fresh capital. This process normally takes at least one or two years. It can be hoped that FY26 will provide this initial push to consumption.

The heartening fact is that official data hints at the creation of more jobs. But they need to be in high-value production and services where income is typically higher. Right now, the jobs are concentrated in construction, logistics, retail, etc. which do not provide the wherewithal for high discretionary consumption. As the economy keeps growing, this matrix will change. It can be hoped that overall growth will be more broad-based with the manufacturing sector providing a major push.

Swipe right for shaadi business: Economic Times 31st May 2025

 

RBI POlicy review: whay this time it is different: Mint 27th June 2025

 https://www.pressreader.com/india/mint-delhi/20250527/282192246909890

Conjecturing Stock Market Movements In FY26: Free Press Journal: Saturday the 24th of May 2025

 

Interestingly, if the week-ending data is examined for the year, it peaked at 85,571 for the week ending September 27, 2024. The low was 72,644 on May 10, 2024. The variation has been around 13,000 points.

If Sensex data is looked at on a weekly basis, it ended on March 29, 2024, at 73,651. One year later, on March 28, 2025, it was at 77,415. The increase was just 5.1%. Interestingly, if the week-ending data is examined for the year, it peaked at 85,571 for the week ending September 27, 2024. The low was 72,644 on May 10, 2024. The variation has been around 13,000 points.

For the 52-week period, the Sensex was less than 75,000 for 11 weeks. For 25 weeks, it was between 75,000 and 80,000 and above 80,000 for 16 weeks. Therefore, on the whole, the performance was more than satisfactory. From mid-July to mid-October, the index was above 80,000, giving a sense of stability. In a way, it can be said that the level of 70,000 has been maintained irrespective of the economic conditions.

In the present financial year, for the 7 weeks ending May 16, 2025, it was less than 76,000 for 2 weeks when the tariff regime of the US was announced. On May 16, it was 82,330. The two random shocks, the terrorist attack in Kashmir and the time India retaliated, were when the index went to less than 80,000. Otherwise, it has been business as usual for the markets and investors.

The significance of all these numbers is that, for the entire year, the stock index has been range-bound.

 

The year was quite tumultuous for the economy as such. First, growth was lower at possibly 6.5% against 9.2% last year. Second, corporate profitability was low over all 4 quarters, with the top-line and bottom-line growth being in single digits. This is one factor which has also affected the GDP growth, as value added reckoned in calculating the GDP is based on corporate profitability. In fact, the IPO market was less ebullient this year relative to FY24.

Third, investment levels remained just about stable, as private sector investment was narrowly focused. The infra-based companies were investing, while the consumer goods segment was rather dormant, as they had excess capacity. Fourth, there was some pushback for government capex due to the elections, and while there was some hurry shown towards the end of the year, there was a shortfall in spending. Fifth, the emergence of Donald Trump as President was significant, as he has been unequivocal in his articulation on the tariff issues. This has rattled stock markets all over, even though the deferrals have been given a big thumbs up subsequently. Sixth, consequently, the FPIs have been whimsical all through the year, with the final net inflow being very insignificant. The prospect of Making America Great Again meant that there would be more investment opportunities in the US, which caused investments to turn away from emerging markets, in particular as they have been targeted more than the developed ones.

There has been, however, a major push from the retail end through the mutual funds route. FY24 was a year when the market delivered very good returns of 25%. This was a precursor to the retail frenzy in the market, where there was a lot of enthusiasm shown in the equity and F&O segments to the extent that the SEBI had to launch a campaign to dissuade the less financially literate investors from staying away from the latter. This was the time when mutual funds picked up and were seen in terms of incremental assets under management, increasing by around Rs 13 lakh crore. This was the phase when bank deposits did not quite yield high returns, which tended to get capped at around 8-8.5% for specific tenures for certain time periods. This provided support to the stock market even while FPIs were quite idiosyncratic.

Against this background, there is reason to be quite satisfied with the stock market performance, as quite clearly, the investor view is forward-looking. The resilience shown by the economy has given confidence that it will remain steadfast this year too, though it may not yet accelerate. More importantly, there are expectations that consumption and investment should improve, which, in turn, will help corporates to do better. The government has given a push to consumption with tax concessions, which, along with lower inflation during the year, should spur consumption, especially in urban areas. The middle class has gotten this benefit, something which was absent in the past.

Further, a good monsoon, which has been predicted for the year, will mean that agricultural harvests should hold up and provide the push to rural incomes and, hence, demand. This has been supplemented by the RBI, indicating more rate cuts after already lowering the repo rate by 50 bps. Housing, in particular, should tick at the consumer end.

Therefore, optimism in the corporate sector is quite profound, which has kept the momentum up. In fact, the fact that India is a domestic-orientated economy means that the impact of higher tariffs by the US, which can lead to a slowdown in exports, may expect the GDP growth only marginally. Further, there are indications that there would be a constructive dialogue between the ministry and the US on the issue of tariffs, which will be a positive for Indian companies that are dealing with exports. The tariff structure announced in April would be implemented in July, and there are indications that several countries are negotiating the same with the US.

Also, with the RBI cutting interest rates, from the point of view of savings, there would be a tendency for the market to once again be more attractive, leading to increased activity. This can be a challenge for banks to garner deposits, as the retail segment continues to put money in the stock market, either directly or through the mutual funds route.

Hence, the overall picture for the markets looks positive. While it will be premature to put a number to the Sensex for, say, December, based on past trends, there will be a range-bound movement which can be in the region of 78,000 to 85,000, with a possible upward movement if corporate performance turns around more decisively. Investors at the retail end need to follow an approach of patience and perseverance, as short-term returns may still be lower than those procured on fixed-income assets. It probably has to be a medium-term stance that has to be taken, as there would be gyrations during the course of the year depending on the economic developments.

Complexities in rating states' debt: Business Line 23rd May 2025

 

The status quo of US ratings: Financial Express: 22nd May 2025

 The lowering of rating of the US by Moody’s has passed off as a non-event. S&P and Fitch had done the same quite a while back. S&P did so in 2011, post-Lehman crisis, and Fitch followed a little over a decade later in 2023. The state of the economy is well-known. The US has a fiscal deficit ratio of 7.6% and evidently spends more than it earns. The debt-to-GDP ratio is 124%, one of the highest in the world. The current account deficit was at 3.9% as of December. All these indicators should have raised a red flag from the point of view of credit rating companies. But this is taken to be a normal given that it is the US. Therefore, downgrading a notch does not really mean much.

The present downgrade has been driven a lot by what the new regime could end up doing. Higher tariffs will necessarily increase inflation which in turn will put pressure on the Fed on rates, which can lead to a slowdown in economic growth. Some also say that the phenomenon of stagflation cannot be ruled out where inflation remains high and GDP growth slows down, if not turn negative.

How then does the US manage this situation with ease? The answer is that for all practical purposes the dollar is the anchor or reserve currency in the world. Dollars are used primarily for all global transactions. The euro, pound, yen, and Swiss franc follow but the dollar is supreme. If that is the case with transactions, there is dependence on the US for the supply of dollars. Only when the US runs high deficit will there be more treasuries that are issued, which central banks all over the world can invest in. Otherwise, this investment option will get diluted.

There was a brief period following the Ukraine war when Russia’s dollar assets were frozen and the nation was pushed out of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system of payments. This was when there was a cry for de-dollarisation. While there has been talk, central banks or nations have made no significant move as such when it comes to dealing with forex assets. The dollar is still strong and used for trade settlements, while central banks have not really changed their composition of assets. Some central banks have opted for gold, but given the physical supply constraints such a move has limitations.

In this context it would be interesting to see the credit default swap (CDS) rates on sovereign bonds to gauge the market flavour. These are notional rates provided by worldgovernmentbonds.com. The CDS is, in a way, the insurance cost that has to be paid against any default on the bond. For AAA rated countries like Switzerland, Sweden, and Finland, the five-year CDS was in the region of 8-13 basis points (bps). In case of AA rated countries, it would be around 20 bps which will be 30 bps for A rated sovereigns. For the US it is in the region of 45-50 bps with AA+ rating. It is higher than that of other similarly rated sovereigns because of the recent developments in economic policies.

Therefore, two points emerge. The first is that this will not really have a bearing on how countries look at the dollar which is still the most preferred asset. In fact, the US President had warned countries which move away from the dollar for settlement of payments that higher tariffs could be imposed on them. The second is that while a downgrade is normally associated with a reputation risk, in case of the US it would not really make a difference. This is because two other agencies had done so earlier, which did not quite move the needle. In fact, American companies have not quite had any issue in raising funds in overseas markets due to the sovereign rating being less than AAA.

A broader issue is the methodology used by rating agencies. There seems to be a stickiness in assigning ratings at both the upper and lower scales. India, for example, would definitely be in the A+ category given a spectacular economic record. Consistently labelled as the fastest-growing economy even during global economic turbulence, there has been a strong regulatory framework on both the fiscal and monetary sides. While consistently recording low current account deficits and attracting high foreign direct investment inflows, the rupee has also been one of the best-performing currencies in the last three years. There has also been a strong improvement in job creation as well as removing people from poverty, a significant achievement over the years.

Besides, government debt is in rupees and the fiscal deficit has been following a glide path downwards. In fact, three global bond indices have included/will be including Indian securities in their basket. This is a strong vindication of the quality of government debt. Under these conditions, there would be a strong case for a rating upgrade. Looking at the implied CDS rates for India, it is 85 bps for a BBB (minus) rating. China with A+ has a CDS of 54 bps while Israel with A rating has a CDS of 100 bps (which can be due to the ongoing war).

There is definitely a need for the credit rating agencies to revisit their approach to sovereign ratings and align them with the changing economic developments to be more realistic. While the argument of anchor currency is pertinent, there must be limits. In fact, if this strong assumption is relaxed, there can be more discipline brought in terms of US policies on budget and the way in which it maintains relations with the rest of the world. Moreover, growth — where India has done very well — is a strong argument to consider when it comes to sovereign rating. Developed countries which fall below the average mark for successive years need to be reexamined. Moreover, the view of the market which is represented by investors cannot be ignored as this entity has skin in the game and is putting money on the table and investing in the emerging markets.

INdia's transmission of repo rate changes has improved over time: Mint 12th May 2025

 https://www.livemint.com/opinion/online-views/rbi-repo-rate-monetary-policy-interest-rate-eblr-mclr-deposit-rates-lending-rates-inflation-forecast-gdp-growth-malhotra-11746711950750.html