Outlook for the Month of January 2025

Economy Review

The key events in the month were –

1. Domestic Factors –

a) Current Account Deficit (CAD) – India’s CAD widened to $11.4bn in Q2FY25 (1.2% of GDP vs 1.1% in Q1FY25), mainly due to a higher goods trade deficit, even as services surplus rose.

b) Trade Deficit – India’s goods trade deficit widens to an all-time high of $37.8 bn in November’24 from $27.1 bn last month on higher imports and decline in exports.

c) Manufacturing PMI – India’s Manufacturing PMI came in at 56.4 in December’24.

d) GST Collection – India’s GST collection in December’24 rose 7.3% yoy to Rs 1.77 tn, reflecting the resilience of the Indian economy.

e) Monetary Policy – RBI in its December’24 policy kept the repo rate unchanged at 6.5% but reduced the CRR by 50bps to 4%.

2. Global Factors –

a) FOMC – The FOMC cut rates by 25bps in December’24 lowering the Fed funds target range to 4.25-4.50% and indicated fewer rate cuts next year.

b) Eurozone PMI – Eurozone Manufacturing PMI remained benign at 45.2 in December’24 below the 50 mark as new orders continued to decline at a sustained pace.

c) Crude Oil – Brent crude oil prices remained range-bound amid benign macro environment.

Domestic Macro Economic Data

Inflation – India’s CPI Inflation moderated to 5.5% in Nov’24 after the sharp uptick to 6.2% in Oct’24, led by moderation in food prices. India’s WPI inflation came in at 1.9% in Nov’24 Vs 2.4% last month.

Outlook for Equities
Global equity indices performed stupendously ending CY24 on a high with a rally noted across the board. The US presidential election and India’s Lok Sabha election played a pivotal role in driving the markets through the year Notably, on the domestic front both Sensex and Nifty surged by 8.7% and 9% for the same period. The mid cap and small cap indices outperformed the large cap index and were up 23.9% each in CY24. In December’24 Nifty declined 2% on account of some slowdown in the Indian economy.

The FOMC cut rates by 25bps in December’24 lowering the Fed funds target range to 4.25-4.50% and indicated fewer rate cuts next year. On the domestic front, India’s CAD widened to $11.4bn in Q2FY25 (1.2% of GDP) mainly due to a higher goods trade deficit, even as services surplus rose. India’s goods trade deficit widens to an all-time high of $37.8 bn in November’24 on higher imports and decline in exports. RBI in its December’24 policy kept the repo rate unchanged at 6.5% but reduced the CRR by 50bps to 4%. Rupee depreciated and touched a historic low of 85.65/$ mark due to stronger US$ and muted FPI inflows. FIIs bought equities worth $1.9bn during the month of December’24 and DIIs continued to be buyers to the tune of $4bn.

We expect Nifty earnings to grow at ~12-13% CAGR over the medium term. Post the recent correction, Nifty is currently trading at ~19x FY26e P/E and valuations have turned attractive. Hence, we believe that although the markets will consolidate for some time before the next up move, investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt

In December RBI MPC sounded concerned on growth, however not ready to act just yet as they wait for second half of the year which might augur well due to demand in the festive season, rural consumption picking up and expenditure from government. RBI revised the real GDP forecast for FY25 lower to 6.6% from 7.2% earlier while revising CPI forecast higher by 30 bps to 4.8%. RBI did acknowledge that beyond a certain point if growth concerns linger policy support would be required. System liquidity came across as a key concern. In the coming quarter busy credit season, demand from agricultural sector and increase in currency in circulation could turn the system liquidity into deficit, along with current month’s tax related outflows. These measures prompted RBI to normalise CRR to 4% which was the level prior to beginning of the rate hike cycle. Governor also added geopolitical situation and volatility in emerging markets posited a need for a cautious approach. RBI is in a wait and watch mode but closer to a rate cut. Likelihood of rate cuts in next fiscal have become more plausible now. RBI MPC minutes showed dissent grew within MPC with few members favouring rate cuts and pointing towards need to reduce interest rate costs for small enterprises.

Banking system liquidity tipped into deficit zone in 3rd week of December’24 as advance tax outflows and GST outflows drained liquidity. Government cash balances also dipped into ways and means advances mode in second week of December’24 as post spending cash balances were low. Forex intervention offset the accretive impact of CRR cut by RBI. In the year 2024 rupee has depreciated by 2.9% and been among the least volatile currencies due to RBI intervention. FPI interest waning caused pressure on currency along with rise in dollar index which appreciated by 7% during the year. In calendar year 2024 FPI’s invested $124mn in equity and $18.30bn in debt.

CPI inflation in November’24 slowed to 5.5%, supported by a sequential fall in food prices, even as core inflation remained stable at 3.7%. Fall in CPI was led by sharp deceleration in food prices, especially vegetables. IIP growth in October’24 improved marginally to 3.5%, despite an adverse base effect. The manufacturing sector led growth followed by electricity while mining growth remained muted. Goods trade deficit in November’24 widened to $37.8 bn from $27.1 bn in October’24 due to a spike in gold imports, while exports slumped to the lowest levels since November’22. Services trade surplus rose to $18 bn.

US FOMC delivered a hawkish cut of 25 bps with the dot plot indicating 50 bps cuts in 2025 compared to 100 bps cuts in the previous dot plot. GDP growth forecast was revised upward for 2024 to 2.5% vs 2% earlier. PCE inflation for 2024 and 2025 was revised higher. Markets are pricing a pause in January’25 FOMC and lower than 50 bps cut in 2025. This led to sharp uptick in 10 year UST which rose 39 bps higher during the month to 4.58%. Brent prices remained in a narrow range ending the month at $74.64/bbl. Markets await direction of domestic buying interest, FPI flows, liquidity, moves on rupee and dollar index. US NFP data and CPI will be closely watched along with tariff related announcements as Trump takes office in January. Benchmark 10 year Gsec closed at 6.76% on 31st December’24 higher by 1 bps during the month. 10 year Gsec yield is likely to be in a range of 6.60%-6.80% in the near term. Spread of 10 year Gsec with corporate bonds is nearly 35 bps and likely to remain between 35-45 bps.