Do it yourself

The 2025^th year of the Christ is beginning on a very tentative note, particularly for investors in financial markets. The past four years have been relatively smooth for investors. With the benefit of hindsight, we can confidently claim that the markets were mostly driven by macro factors. Unprecedented liquidity infusion by the central banks and fiscal support to consumers across the world helped most asset classes to perform well.

Despite massive global disruptions due to the pandemic and geopolitical, the volatility in markets was largely contained. Since most asset classes yielded decent returns for investors, they were not really pushed hard to make choices.

However, the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make.

Choose your path carefully

Making right choices, in my view, would be the central investment challenge for the year 2025. The following situations, for example, would challenge investors to make a choice.

Promise vs. delivery

In the past few years, the Indian markets have been largely driven by the political and corporate promises, ignoring the actual delivery, especially in the matters of investments, infrastructure development, growth, and profitability. In the past few months corporate promises have started to moderate, albeit very gradually; but the government promises continue to remain rather exaggerated.

The themes like manufacturing for import substitution/export promotion, defense production, railways modernization and expansion, development of tourism ecosystem, clean energy, etc., which were mostly based on the government promise, have been popular with the investors in the recent years. The stocks associated with these themes have yielded extraordinary returns for investors.

Many businesses, especially those associated with these macro themes, also promised sustainable growth and profitability. So far, only a few have delivered on their promise. Very soon, investors would need to choose whether to continue relying on promises or shift the focus on businesses that have been delivering consistently.

Globally, the promises of the Trump 2.0 regime are becoming a major investment theme. The investors would also need to make an assessment of how much of Trump’s promises are deliverable and invest accordingly.

Short stories vs. epics

For ages, collections of short stories like Panchatantra, Jataka Tales, Aesop’s Fables, etc. have been key influencers of the value system, morality and consciousness of human beings. Very few of us would have bothered to read the full text of epics like Ramayana, Mahabharata. We know the broader plots and teachings of these epics through brief narrations by elders, TV shows and movies.

Similarly, most of the successful investors would have created their wealth by investing in some small ‘stories’. Investing in a broader macro trend (epics) requires a lot of patience, deep understanding of economics and deep pockets to weather through the macro cycles. For the impatient, small investors with low understanding of economic cycles, macro trends intermittently provide a lot of excitement. Extraordinary profits made riding popular waves, if not encashed in time and preserved, often perish in no time.

Anecdotal evidence suggests that a lot of investors are presently invested in “the epic India story”. It is important to note that this story has been unfolding since the early 1990s, and might take many more decades to fully unfold. In the past 34 years there have been many periods of rejection of this story as a valid investment theme. 2025-2026 could be another phase when a large section of investors, especially foreign investors, reject this story as bogus.

Small investors thus need to make a choice whether to stay invested in ‘the epic India story’ (macro themes like infra development, demographic dividend, rise in income & consumption etc.) or focus on finding some small stories that may yield results in the short period of time.

"MAGA" and "BRICS as a unified market with common currency" are some examples of global epics, which investors might need to accept or reject.

Jingoistic defiance vs. pragmatic escape

The year 2025 might bring many investors face to face with ground realities – social, political, and economic. Many of them may discover that their current portfolios of investment are not actually in sync with the current ground realities. Investors would need to make a choice whether to stay committed to their current asset allocation and investment portfolios; or make a strategic change and bring the portfolios in sync with the latest ground reality.

This may, for example, require rationalization of tactical debt allocations made to take advantage of sharp fall in bond yields; evaluation of gold allocation made in anticipation of easing bond yields & rising geopolitical tensions; and investment in traditional FMCG businesses which are facing margin & growth challenges.

Absolute vs relative return

With a material rise in the investments made through professional investment managers (MF, PMS, AIF etc.) in the past four years, investors have become used to assessing the performance of their investment portfolios relative to the benchmarks set by these professional investment managers. The relative return argument (or “strategy” if you prefer to use this jargon), functions well only if the benchmark continues to provide positive returns consistently. For those investors who are depending on their portfolio of financial investments to meet key goals of their life, e.g., financial freedom and retirement planning etc., a couple of years of negative return could spoil the entire math.

The investors whose investment objective involves any one or more of the following ought to prefer an absolute return strategy, instead of a relative return argument. For their investment objective would invariably involve a defined cash flow over a definite period of time. Their investment strategy must therefore focus on making a reasonable rate of absolute return over the “defined” period of time. Beating the benchmark index should be the least of their concerns.

·         Retirement planning – regular income to supplement the loss of salary/wages.

·         Goal based investment, e.g., buying a house, children education expense.

·         Financial freedom - assured minimum income to allow

2025-2026 could be one such period where non-institutional investors might have to make a choice between relative return and absolute return strategy.

Telangana was the first State in India to implement a basic income scheme for all the 6 million farmers of the state, in 2018. Under the Rythu Bandhu Scheme, the state government offers to pay Rs10000/year to the farmers of the state, irrespective of the size of landholding. The amount is given by a bearer cheque through Village Panchayat. Commendably, before implementing the scheme, the State made all land titled good, by completely digitizing the land records and issuing new fully secured title deeds (Land Pass Books) to all the farmers. All land holdings records are transparent and could be digitally verified by anyone.

The sentiments of greed (risk-taking) and fear (risk-aversion) are two key factors that determine the breadth and depth of the stock market performance over a short term.

In the risk-averse phase usually themes like large cap, defensive, value, dividend yield, etc. lead the market performance. In this scenario, the market breadth is usually narrow; fewer companies raise fresh capital; volatility is low; and market breadth is consistently poor.

On the other hand, in the risk-taking phase, themes like small and midcap, growth, cyclicals, etc. lead the market performance. In an environment supporting risk-taking, usually the market breadth is strong, volumes are above average, and volatility is higher. The primary market is very active in this phase, as a larger number of entrepreneurs look to raise fresh capital for growth and deleveraging.

The year 2024, however, has seen some divergent trends. Several contradictions prevailed, which not only raise doubts about the validity of the current risk-taking phase in the conventional sense, but also present a higher probability of emergence of a severe risk-aversion phase in the near term. For example, consider the following:

·        Small and midcap stocks consistently outperformed the benchmark Nifty throughout the year, despite several risk affecting events like BJP not securing majority in the general elections in India; serious escalation in the Middle East Asia geopolitics; outcome of presidential elections in the US threatening a full-scale tariff war; growth slowing materially in Europe, China and India; sticky inflation restricting global easing cycle; corporate earnings failing to meet expectations etc.

·         The promoters raised over Rs three trillion through initial public offerings (IPO), qualified institutional placements (QIP), and rights issues. However, most of the QIP and rights issue money was used to deleverage the balance sheets rather than expanding capacities – usually a sign of risk-aversion. Even many of the IPOs were 'offer for sale', where the promoters diluted their stakes.

·         Foreign portfolio investors have been net sellers in Indian equities in the year 2024. In the secondary market, FPIs sold over INR 1.1 trillion worth of equities in 2024. However, they bought almost a similar amount in the primary market. The share of the Indian listed market capitalization owned by FPIs fell to ~16%, the lowest level in a decade. The domestic institutional investors however purchased over INR 5.1 trillion worth of equities in the secondary market. The share of the market capitalization owned by the household investors increased to the highest level in the past 15 years.

Historically, the correlation of FPIs’ net flows and Nifty returns in a given year has been poor; but the rise of household share in stock ownership has mostly led to a risk-aversion phase in the markets.

·         Despite significant outperformance of the small and midcap stocks, the market breadth and overall traded quantity has not been supportive of a risk-taking trend. In the 6 out of first 11 months of 2024, market breadth has been negative. Overall, the market breadth is neutral. The traded quantity has been mostly below average in the last six months.

·        The implied volatility has been mostly moderate to low, except for a brief spike in May 2024 (election month), usually not a sign of a risk-taking phase.

 

The Federal Open Market Committee (FOMC) of the US federal Reserve (Fed) obliged the market consensus by cutting its overnight borrowing rate by 25bps to a target range of 4.25%-4.5%. One member of FOMC voted against the cut, preferring to maintain the status quo.

Noting the economic conditions, especially still elevated inflationary expectations and resilient growth, the Fed indicated that 2025 may see fewer cuts than the previously estimated number. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

The FOMC raised its projection for full-year 2024 GDP growth to 2.5%, from 2% in September. However, in the following years, the FOMC officials expect GDP to slow down to its long-term projection of 1.8%. The committee lowered its expected unemployment rate in 2024 to 4.2%, while headline and core inflation were pushed higher to 2.4% and 2.8% respectively, slightly higher than the September estimate and above the Fed’s 2% goal.

The resilient growth and elevated inflationary expectations would require the Fed to hike or hold rates in 2025. However, officials appear wary of keeping rates too high and risking an unnecessary slowdown in the economy.

Insofar as the Trump 2.0 policies and their impact on the growth are concerned, the Fed Chairman Jerome Powell prefers a wait and watch approach. IN the post FOMC meet press interaction he said, “We’re just not at that stage.” He further added, “We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented.”

The financial markets reacted negatively to the FOMC decision. Dow Jones lost 1123 (2.58%). Falling for the tenth consecutive day, it has recorded its worst losing streak since an 11-day slide in 1974. The S&P500 (-2.95%) and Nasdaq Composite (-3.56%) fell even more. The benchmark 10-year treasury yields jumped 3.08% to 4.52%, the highest level since April 2024 and 90bps higher than their August 2024 lows. UST Index rose 1.2% to its highest level in almost three years. Gold prices fell 2.3%, taking the yellow metal below US$2600 level after 3 months.

Traditionally, the asset allocators have considered the potential return of the various alternatives (to equity and fixed income) to determine the portfolio structure of investors. Of course, the factors like size of portfolio, feasibility of investing in assets like real estate, risk appetite of individual investor, and liquidity requirements etc., influence the allocation to some alternatives. However, dematerialization of assets like real estate (through REITS), Gold (ETF) Bonds (bond funds, RBI direct investment platform etc.) now makes the alternatives relevant even for small investors.

In the past one year, the alternatives assets (e.g., gold, bitcoin) have performed significantly better than equities. Even the average yield of long duration bond funds has been similar to the Nifty50 return. The investors may therefore want to evaluate the return prospects of these alternatives in future to determine their asset allocation strategy.

In this context, I note the following to review my asset allocation strategy for 2025.

Bonds

Bond yields have consistently outperformed the equity yields in the past three years. In 2024, even the return on long duration bonds matched the Nifty50 returns. The consensus currently is that the RBI rate cut cycle in 2025 would be shallow with 25-50bps overall cut. Doubts are emerging on continuation of the Fed rate cut cycle also. The resilience of stock prices despite earnings downgrades, implies low chances of any material rise in equity yields. Bonds might thus remain an attractive asset class in 2025 also.

Gold

The World Gold Council (WCG) has forecasted a “positive but much more modest growth for gold in 2025”. The yearly outlook paper of WCG notes that “Upside (in gold prices) could come from stronger than expected central bank demand, or from a rapid deterioration of financial conditions leading to flight-to-quality flows. Conversely, a reversal in monetary policy, leading to higher interest rates, would likely bring challenges.”

The best case for Gold appears reversal in rate cycle with forecast of “higher for longer”. A dovish Fed, de-escalation of conflicts in the middle east and Europe, and lower intensity of trade wars, as compared to the present estimates, could be very negative for gold prices.

The weakness in USDINR, capital controls to manage balance of payment and change in duty structure are some additional factors to be considered for the Indian investors buying gold in INR. To me Gold appears less attractive in 2025.

Real Estate

The demand for housing remains robust, driven by resilient end-user interest and favorable macroeconomic factors. Inventory levels are now low in the ready to move category in most key markets. With new launches in mid segment slowing in the key markets, the prices are expected to remain firm in 2025.

As per Kotak Securities, Commercial real estate in top Indian cities saw healthy traction in 2QFY25. Vacancy levels inched lower. GCCs continue to lead the demand for commercial real estate, even as IT companies increased their headcount in 2QFY25 after six quarters of reduction; utilization rates remain high. Occupancy levels across asset owners have improved, aided by floor-wise denotification and consequent leasing of SEZ areas and a stronger push towards “return-to-office” by IT employers. Despite the recent price uptick, office REITs offer an attractive yield + appreciation play within Indian real estate. For me Real Estate (REITS) will thus continue to remain a preferred asset in 2025.

Crypto

More and more governments are now inclined to view crypto as a legitimate asset. President-Elect Trump has also hinted towards a favorable regulatory regime for crypto assets. As per the global investment major Fidelity, “Liquidity metrics have turned back to positive year-over-year growth, and we have entered another interest rate-cutting cycle. Inflation is still elevated above the Federal Reserve's 2% target and so I personally think there is still a risk of inflation coming back in a 'second wave.' Both of these things would be tailwinds for bitcoin.”

Despite a sharp up move in bitcoins, and high volatility it is difficult to ignore this emerging asset class in overall portfolio allocation.

A veteran investor recently recommended investors to buy “bruised blue chips”. He was purportedly referring to the consumer goods manufacturers that have underperformed in the year 2024. For reference, Nifty FMCG index is down 0.3% YTD2024 against ~14% rise in Nifty50. Historically in India, the FMCG sector had mostly outperformed the benchmark indices. Intermittent short periods of underperformance were traditionally seen by the long-term investors as an opportunity to buy/add FMCG stocks to their portfolio.

However, the trend seen in the past one decade (reasonably long period in my view) seems to be defying this conventional wisdom. Since 2014, Nifty FMCG has yielded a return of ~236% against a rise of 305% in Nifty 50. Thus, the conventional wisdom of preferring consumer goods manufacturers may not have been a great investment strategy, even accounting for the higher dividend yield in consumer stocks.

In my view, the underperformance of traditional FMCG blue chips is structural and may continue in future also. There are several factors which support this view of mine. For example—

·         I believe that in the Indian consumer market, the balance of power has shifted from the large pan India producers/brand owners (mostly colonial era legacy monopolies) to technology partners (e.g., Quick Commerce, Ecommerce), logistic partners (Modern Retail, Warehousing, Transportation, Payments), regional producers/brand owners (especially for ready to eat food and snacks catering to local tastes and dairy), financiers (consumer finance), scaled up ancillary units catering to multiple brands (contract manufacturing, packaging, digital marketing etc.). The scalability, growth prospects and profitability are much higher in most of these new/emerging “consumer” businesses.

·         The composition of the spending on FMCG basket has seen a conspicuous shift in the past one decade. The current FMCG basket includes a large portion of consumer services, e.g., Data, Food Delivery Services, Beauty and Personal Care Services, Healthcare (Diagnostics, Insurance, Clinic), Air Travel, Quick Service Restaurant (QSR), etc. The share of goods, earlier considered discretionary, like Alcohol, Transportation and Cooking Fuel, Packaged Ready to Eat Food, Fashion Accessories, etc. has also increased materially in the middle-income households’ non-discretionary consumption basket.

·        It is estimated that the share of the items traditionally considered “discretionary” in the India consumption basket may increase 3x from 13% in 2000 to 39% in 2030. The stock market is obviously interested in growth (discretionary consumption), moving away from de-growth (staples).

·         In a few years, some of the food delivery services providers, quick commerce platforms, QSR chains, beverage bottlers, traditional sweets & snacks brands may become bigger, more popular and fit the “Buffet Investment Criteria” better than the traditional FMCG brand owners/producers.

I shall therefore not be in a hurry to buy the 2024 underperformers; for some of these might be damaged, not just bruised.

Also read:

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (November 2024 Round). Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence – Present tense, hopes high for future

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period declined marginally owing to weaker sentiments across the survey parameters except household spending. The current situation index (CSI) moderated to 94 in November 2024 from 94.7 two months ago. (A value below 100 indicates a state of pessimism)

However, for the year ahead, consumer confidence remained elevated, improving 50bps from the previous round of Surveys. Households displayed somewhat higher optimism on one year ahead outlook for major economic parameters, except prices. The future expectations index (FEI) stood at 121.9 in November 2024 (121.4 in the previous survey round).

The respondents’ sentiments towards current earning moderated marginally, they displayed high optimism on future income which was consistent with their surmise on employment conditions. Households anticipated higher spending over one year horizon on the back of higher essential as well as non-essential spending.

Household inflationary expectations rise

Households’ perception of current inflation rose by 30bps to 8.4%t, as compared to the previous survey round. Inflation expectation for three months horizon moderated marginally by 10 bps to 9.1 per cent, whereas it inched up by 10 bps to 10.1 per cent for one year ahead period.

Compared to the September 2024 round of the survey, a somewhat larger share of respondents expects the year ahead price and inflation to increase, mainly due to higher pressures from food items and housing related expenses. One year ahead, the price expectation of households is closely aligned with food prices and housing related expenses.

Male respondents expected relatively higher inflation in one to three months, as well as one year ahead, as compared to the female respondents.

GDP: Real gross domestic product (GDP) is expected to grow by 6.8% in 2024-25 and 6.6% in 2025-26. Forecasters have assigned the highest probability to real GDP growth in the range 6.5-6.9% for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.2% and 7.9% (revised down), respectively. Real gross value added (GVA) growth projection has been revised down marginally to 6.7% for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

 Inflation: Annual headline inflation, based on consumer price index (CPI), is expected to be higher at 4.8% for FY25 and 4.3% for FY26.

External sector: Merchandise exports and imports are projected to grow at a slower rate of 2.4% and 4.6% respectively in FY25 and recover to 5.5% and 6% respectively in FY26, in US dollar terms. Current account deficit (CAD) is expected at 1.0% (of nominal GDP) during both FY25 and FY26.

The two-decade period between 1988-2008 saw the most remarkable progress in the sphere of international relations and collaborations. The technological developments made global trade faster and cheaper, aiding global businesses to collaborate with distant partners to optimally exploit their core competencies to materially enhance productivity. End of the Cold War and fall of the Berlin Wall led to nearly full integration of global economies and unprecedented growth in global trade.

Notwithstanding a marked slowdown in the past few quarters, the Indian economy has managed to grow at a decent pace in the current global context. Though India may have lost the crown of the fastest growing global economy to Vietnam, it still remains the fastest growing amongst the top 10 global economies.

The Reserve Bank of India is holding US$658bn in forex reserves, which is considered adequate in normal circumstances or even in a usual cyclical slowdown. Despite accelerated selling in equity markets by the foreign portfolio investors (FPIs), the current account deficit of ~1.5% of GDP, is conveniently manageable. INR has been one of the most stable emerging market currencies. On the real effective exchange rate (REER) basis INR is presently ruling at a five-year high level.

In their recent policy review, the Monetary Policy Committee (MPC) of the Reserve Bank of India has cut growth estimates for FY25 by 60bps to 6.6% and 1QFY26 by 40bps to 6.9%. The MPC has also hiked their inflation forecast for 2HFY25 and 1QFY26. The RBI estimates are still few basis points higher than the average estimates of professional forecasters, as per the RBI’s recent survey. It is therefore likely that growth slowdown extends well into 1HFY26.

RBI has once again made it clear that it is not comfortable about the inflation trajectory and would prefer to outweigh price stability against growth in its policy dynamics. In the recent meeting, the two external members of the MPC voted in favor of a 25bps repo rate cut, but the RBI’s official nominees voted to maintain a status quo, despite loud growth concerns and political rhetoric for monetary easing.

The market consensus seems overwhelmingly in favor of a February 2025 repo rate cut. This assumes growth staying in the slow lane; lower food and energy inflation; and fiscal improvement as promised in the union budget for FY25. We need to watch for development of La Nina, adversely impacting the Rabi crop; slowdown in tax collection and rise in cash subsidies due to election promises adversely impacting the fiscal disincline. Compensating higher subsidies with a cut in capital expenditure (as has been the case in 1HFY25) would further slowdown the potential growth, making any monetary easing more inflationary.

At the surface level there is nothing that would ring alarm bells for domestic investors. However, some of the recent actions of the RBI are reminiscent of the 2013 crisis period. The monetary policy is increasingly sounding like a plan to secure the stability of USDINR.

I wonder if RBI is really worried or it is just cautious and taking preemptive steps to mitigate any chance of a balance of payment crisis and/or currency volatility.

I have taken note of the following data points; and at the risk of being labeled unnecessarily paranoid, I would keep a close watch on these for the next few months to assess any vulnerability in India’s external sector.

·         There has been a marked slowdown in foreign flows -both portfolio flow and FDI flows in the past one year. The political changes in the US and Europe may further impact the flows in 2025. RBI may not want to further discourage flows by offering lower bond yields. For record, the India10y-US10y yield spread has already fallen from a high of 350bps in January 2024 to ~250bps.

·         RBI has created a record short position in USD (over US$49bn in forward market) in the past couple of months to protect USDINR; besides running down Fx reserves by ~US$47bn in just one month (from US$705bn in October 2024 to US$658bn in November 2024)). It has taken almost US$96bn to keep USDINR stable in the 83-50-84.50 range.

It is critical to watch this because:

The global trade war could escalate, before it settles after the inauguration of President Trump. This could slowdown global trade; lead to China dumping on non-US trade partners; slowdown in remittances and services exports to some extent.

As the denominator (nominal GDP) goes down and exports also slow down, the current account deficit may show a tendency to rise, pressuring INR. The RBI cannot afford to spend another US$100bn on defending USDINR.

RBI has hiked the ceiling on interest rates offered by scheduled commercial banks on foreign currency deposits of NRIs. This is an early sign of the RBI worrying about Fx reserves. Any measure to limit foreign spending, investments (outward FDI) and LRS remittances will confirm these fears.

Presently, FPIs own about US$650bn worth of Indian equities, which is equal to official fx reserves of India. A US$12bn (appx 1.75% of total holding) sale in the past couple of months has caused some damage to the market sentiments. A 5% selling (US$35bn) could seriously damage equity markets, currency markets and RBI’s gameplan. Remember, on an average, we are running a ~US$20bn/month trade deficit; and a net external debt of over US$682bn. In a crisis situation, US$658bn reserves might not prove to be adequate.

·         President-Elect Trump and some of his designated team members have explicitly termed India a “currency manipulator” and demanded RBI to strengthen USDINR. If RBI is forced to meet these demands, it may need to unwind its short USD position, conduct aggressive OMO to buy USD from the market, and engineer higher yields (bond and/or deposits) to attract more USD flows into India. This could make maintaining current account balance a challenging task. Especially in an environment, where China could be dumping everything in the global markets, and competitors like Vietnam, Indonesia, Philippines, Turkey are becoming very aggressive.

If you find it confusing, impertinent, misplaced, let me sum this up in short for you. I would prefer to totally avoid macro trades in 2025, and stay committed to individual business stories that I like.

The National Sample Survey Organization (NSSO) released results of the Comprehensive Annual Modular Survey 2022-2023 a few weeks ago. The survey made many interesting findings. Some of the key findings could be listed as follows:

Primary school enrollments: Among persons of age group 6 to 10 years, about 90.5% in rural areas and 89.2% in urban areas are currently enrolled in primary education.

25% of rural children and 20% of urban children who never enrolled in school, did it because they were not interested in studies. Another major reason for non-enrollment was “parents not interested in sending them to school”.

Among persons aged 15-24 years, around 97.8% of males and 95.9% of females are able to read and write short simple statements in their everyday life with understanding and are also able to perform simple arithmetic calculations.

Secondary education: In urban areas, only 56.6% persons of age 25 years and above have some secondary education. Whereas, in rural areas, this ratio is much lower at 30.4%.

Only about one third of all graduates were science and technology graduates.

Financial inclusion: Around 94.6% of adults have an account individually or jointly in any bank/other financial institution or with mobile money service providers at all-India level. More adults in rural areas have bank accounts as compared to the urban areas.

Digital access and skills: About 94.2% of rural households and about 97.1% of urban households possess telephone and/or mobile phones. About 59.8% of people above the age of 15years have access to the internet.

Among persons aged 15-24 years, around 78.4% reported the execution skill of ‘sending messages (e.g., e-mail, messaging service, SMS) with attached files (e.g., documents, pictures, video)’. In the same age group, around 83.6% of males and 72.7% of females reported execution of the above skill.

About 38% of people were able to perform online banking transactions. (30% in rural areas and 40% in urban areas). Only 17% in rural areas and 37.7% female in urban areas were however able to make an online banking transaction.

Access to Transportation: Around 93.7%t of the urban population has convenient access to low-capacity public transport within 500 meters from the place of living.

About 94% of the rural population has access to an all-weather road within 2kms from the place of their residence.

Cost of healthcare: The average medical expenditure per household on hospitalization during a year is Rs 4,496 in rural areas and Rs 6,877 in urban areas whereas the average out-of-pocket monthly medical expenditure per household on non-hospitalization during is Rs 545 in rural areas and Rs621 in urban areas.

Out of the average medical expenditure, about 91% in rural areas and 76% in urban areas was borne by the households. This implies public healthcare services in rural areas are much worse as compared to the urban areas.

Clean cooking fuel: About 63% of households use clean cooking fuel. The proportion is much less in rural areas (49%) as compared to urban areas (93%).

Unemployment: Around one fourth of the youth in the 15-29 years age group reported to be not in education, employment, or training. The ratio was highest in rural females (over 46%).

Indebtedness: Around 18.3% of adults have some outstanding loan. Rural adults are more likely to have a loan than an urban male. Male indebtedness is much higher as compared to the female indebtedness.

The 3-day bi-monthly meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) begins today. This would be the last meeting before presentation of the Union Budget for the year FY26. The members of the MPC would draw inputs from the latest national accounts (2QFY25 GDP data); October 2024 inflation data; October 2024 Professional managers’ survey results; September 2024 IIP estimates; November 2024 PMI and core sector growth data; April-October fiscal balance data; global developments (political and geopolitical); global inflation, rates, currency and market trends; expert opinions and views of the members of MPC; and assessment of the current and future situation provided by the staff of RBI.

The statement of the MPC on macroeconomic outlook and likely direction of the monetary policy will be a key input in preparation of the Union Budget for FY26. However, the market participants’ interest in the MPC meeting appears limited to whether, or not, at 10AM on 6^th December 2024, the RBI governor announces a repo rate cut and/or a cut in the cash reserve ratio (CRR). Some TV show panelists might also bother to note the downward revision, if any, in the growth estimates for FY25.

If the MPC decides to maintain a status quo on its policy stance – considering growth slowdown a temporary blip expecting a recovery from 3QFY25; and continue to accord higher weightage to still elevated inflation and highly uncertain and volatile global conditions, the market participants may be hugely disappointed.

Not to cut: In the October policy statement, the governor had adequately hinted about its preference for price stability over growth (see here). Perhaps RBI is much more conscious about the looming external threats, especially the balance of payment situation if there are sudden FPI outflows; or the FDI flows get restricted; or remittances are affected.

Or to cut: In the recent weeks, RBI has allowed USDINR to sustainably breach 84 mark. It appears that it may want USDINR to weaken further before Trump takes over the US presidency on 20^th January, and urges its trade-surplus trade partners to strengthen their currencies. We have seen a similar weakness in USDCNY also, for example. A token 25bps or an aggressive 50bps rate cut could drive USDINR to 86 in near term, providing RBI a leverage to engineer a ~5% USDINR appreciation to ~83 level in the next three months.

In either case, the transmission of the lower rates may not be in the corresponding measure, as RBI might continue to control credit growth and liquidity to reign inflation, asset quality and excessive unsecured lending. I therefore would not expect a CRR cut. I am however mindful that the market is pregnant with the hope of a CRR and/or repo rate cut and no action in this regard may lead to a sharp sell-off in financial stocks, especially NBFCs.

The market participants may also take note of the following three potential near term risks:

·         Besides the real GDP growth, the nominal GDP growth has also fallen to 9% in the 2QFY25. A lower nominal GDP growth directly impacts the tax collections and corporate profitability. November manufacturing PMI is at 11 months low. Core sector growth has also been low in 3QFY25. Expecting an immediate revival of growth in 3QFY25 may not be prudent; and the RBI may not mind a transitory higher inflation to boost nominal GDP growth.

·         The president-elect Trump has explicitly threatened the BRICS nations to refrain from any misadventure that would impact supremacy of USD. It may purely be rhetorical to gain some upper-hand in trade/sanctions negotiation with Xi and Putin. Nonetheless, it could cause higher volatility in the global markets. It becomes critical given that BRICS members supply two thirds of global fossil fuels.

·         The outgoing president Biden has provided a complete pardon to his son, who was facing multiple criminal charges in the US. Biden had earlier categorically denied this favor to his son. Experts are interpreting this as an indication of rising fear of a widespread witch hunt by the Trump administration. The witch-hunt, if it does take place, may not remain restricted to the domestic political opponents of Trump. 

India’s real GDP grew by 5.4% yoy during 2QFY25 (July-Sep); the slowest growth rate recorded since 3QFY23. The Reserve Bank of India had forecasted a growth of 7%, just a month ago, while the market consensus was less sanguine at ~6.5%.

For the argument’s sake, some of the slowdown in 2QFY25 could be attributed to a high base (2QFY24 GDP grew at 8.1%). However, it is tough to deny that the Indian economy has been growing below potential in most of the post global financial crisis (GFC-2009) period. In fact, it will not be totally perverse to argue that in the past one decade or so, the potential growth curve itself has moved lower.

For record, the Indian economy has grown at an average rate of 5.8% during the past decade (FY15-FY24). Even normalizing for the Covid-19 lockdown impact, the Indian economy has grown at an average rate of 6.0%, much below the estimated potential growth rate of over 8%. The real GDP had grown at an average rate of 7.8% during the preceding decade (FY05-FY14).

The slowdown in 2QFY25 has been led by the industrial sector, especially, manufacturing and core sector (e.g., mining and electricity) – a sector that has been the highest priority area for the incumbent government in the past decade. Agriculture (3.5% growth) sector did well on the back of a bountiful monsoon; and services also grew at a decent 7.1% led by public administration. On demand side, investments contracted for the fourth consecutive quarter, belying the promise of a massive jump in allocation for capex in the union budgets for FY24 and FY25. Private consumption grew 6% yoy on a low base of 2.6%, but declined qoq, despite the higher DBT.

The fiscal data for April-October 2024 period shows that contrary to its commitment in the union budget, the government has sacrificed capital expenditure in favor of direct cash transfer (DBT) to households. Ahead of key state elections, the government transferred an advance installment of tax devolution to states to meet revenue expense obligations. The central government capex (including on defense) was much lower than the budget targets. The disbursement of the promised capex loans to the states was also lower. Revenue expenditure on education, drinking water and sanitation were restrained to increase DBT allocation.

The popular narrative after the announcement of 2QFY25 GDP data appears to be that high effective rate of taxes and higher interest rates are hurting the growth and fiscal and monetary stimulus may lead to a course correction. I sincerely beg to differ from this hypothesis.

I have often highlighted that the obstacles to the acceleration in India’s growth rate are structural and not cyclical. Inability to adequately exploit our most valuable resources – the human capital and the largest pool of arable land in the world – is the principal reason for below potential growth. Consistent misallocation of capital, adhocism in policy making, lack of a conceptual growth framework, a distorted federal political structure, blatant pursuit of crony socialism, and lack of a long-term socio-economic growth plan.

In this context, it might be pertinent to note the OECD has projected a gradual deceleration in the potential growth rate of the Indian economy in the next four decades, as the marginal productivity of capital declines and contribution from technological progresses diminishes. (Table 1). The potential rate declines, even if in a blue-sky scenario, where India is able to take fuller advantage of its demography and is able to achieve a much higher rate of capital accumulation and employment (Table 2). (see full report here)