India, the global investment darling of the year, is expected to maintain its robust economic growth into 2024, according to a report by Citi's Indian economic team, equity, and fixed income strategy teams. The report, titled "India 2024 Outlook - Shining Through the Election Fog," provides insights into the trajectory of major asset classes in India for the upcoming year.
Economic Fundamentals: With global interest rates rising, the US dollar appreciating, and oil prices increasing, India's economy is projected to continue its strong growth. The GDP for the fiscal year 2024 is expected to reach 6.7%, with a slight slowdown to 6.2% in the fiscal year 2025 due to the global economic slowdown.
Indian Stock Market: For 2024, Citi maintains a constructive view on the Indian market, anticipating robust earnings growth. The NIFTY index is projected to reach a target of 22,500 points by December 2024, with a forward price-to-earnings ratio of 19 times, suggesting an approximate 5% upside from current levels. Despite significant foreign capital inflow into the Indian stock market this year, Citi's index indicates a decrease in India's over-allocation in investors' emerging market portfolios.
Indian Bonds and Rupee: Global nominal interest rates are likely to decline, and a US economic recession seems imminent. Indian policies are expected to shield Indian assets from risk-averse/deleveraging headwinds, leading to a gradual reduction in interest rates. Yields are anticipated to decrease, and the Indian Rupee is expected to remain stable.
The 2024 Indian general election will play a crucial role in shaping the trajectory of various asset classes, including stocks. Citi expects the current Prime Minister Modi's party to have a high probability of victory, maintaining political continuity and posing minimal risk to the market.
Economic Outlook for Fiscal Year 2025: Despite external headwinds, India's economic growth exceeded expectations in 2023. The risk associated with the 2024 general election results seems low, reigniting hopes for improved capital flows and private capital expenditure recovery. Global headwinds could reduce global economic growth by 70 basis points to 1.9%, with the US economy on the brink of recession.
For India, GDP growth is expected to moderately slow from 6.7% in the fiscal year 2024 to 6.2% in the fiscal year 2025, with headwinds in domestic and external demand. However, there is still hope for a revival in capital expenditure. India might aim to reduce its fiscal deficit to 5.6% in the fiscal year 2025, though the mid-term target of 4.5% remains challenging.
The easing of inflationary pressures and the decline in the strength of the US dollar will allow India to gradually reduce policy rates from mid-2024, with the first rate cut expected in June 2024. An overall CPI average decrease to 4.5% in the fiscal year 2025 should be sufficient for the Reserve Bank of India to begin reducing interest rates by 50 basis points from mid-2024.
Regarding the impact of the general election on the economy, Citi notes:
The ruling party's strong performance in recent state elections increases the likelihood of victory in the 2024 general election. This strengthens market expectations for policy continuity, potentially aiding positive stock market sentiment and growth in private sector investment.
Indian Stocks: Positive Outlook for Earnings Growth Citi maintains a constructive view on the Indian stock market for 2024, expecting strong earnings growth. The NIFTY index's target for December 2024 is set at 22,500 points, with a forward P/E ratio of 19 times, indicating about a 5% upside potential.
Considering relative and absolute valuations, Citi notes that Indian stock market valuations are above long-term averages. However, this is justified given the relative growth resilience and challenges in other emerging markets. Citi/consensus expectations for NIFTY's earnings per share growth are 17%/20% for the fiscal year 2024 and 14%/15% for the fiscal year 2025.
Regarding sectoral preferences, Citi's stance remains unchanged:
Overweight: State-owned utilities/defense, industrials, and banking/insurance; Underweight: Consumer goods, IT services, metals.
Large Caps vs. Mid Caps: Preference for large caps over mid caps. However, funds have started flowing more towards small and medium-sized enterprises, a trend that may continue.
Regarding fund flows, domestic capital inflows in India remained strong in 2023, with an increase in Systematic Investment Plan (SIP) inflows after a slowdown in 2022. Foreign capital inflow was about $14 billion in the first half of 2023, compared to an outflow of about $17 billion in 2022. Citi points out:
We have previously emphasized that substantial domestic capital inflows have reduced the volatility of the Indian market and led to a revaluation over the past decade.
Between March and July 2023, a total of about $35 billion flowed into emerging markets, with India attracting over 50% of it; between August and October 2023, $50 billion flowed out of emerging markets, with India accounting for about 6% of it. This indicates a relative preference for India among foreign investors.
Although India's allocation in emerging market funds has increased, data from our regional team shows that India's over-allocation in emerging market portfolios has gradually decreased, now approaching neutrality. Meanwhile, India's weight in benchmark indices has further increased.
Looking ahead to the Indian market's performance next year, Citi points out five aspects to watch:
a) Consumption: K-shaped growth may continue in the short term, with a focus on whether the consumption growth base is broad.
b) Capital Expenditure: Public capital expenditure is expected to maintain growth momentum, while private capital expenditure should gradually improve;
c) Elections: The general election results will be closely watched, with state election results reducing the tail risk of surprises;
d) Credit Growth: Expected to slow down in the future, with a close watch on the trend of unsecured loans.
e) Fund Flows: India is in a favorable position in emerging markets, with surprising domestic capital inflows.
Indian Government Bond Yields to Decline, Rupee Likely to Remain Stable Regarding Indian government bonds and foreign exchange, Citi notes that Indian government bond yields will eventually decline, and the Indian Rupee is likely to remain stable.
Global nominal yields may slow down, and a US economic recession seems imminent. Enhanced policy mechanisms and external buffers in India will largely protect Indian assets from risk-averse/deleveraging headwinds. Additionally, India may gradually relax policies, leading to a decrease in yields, while the Indian Rupee is expected to remain relatively stable.
Looking further, Citi points out that tight fiscal policy and loose monetary policy provide conditions for a decline in yields,
Over $25 billion in foreign direct investment inflows will help reduce yields, with Indian 10-year government bond yields potentially approaching 6.5% by the end of the year.
The Indian Rupee is expected to remain stable, with Citi noting:
For several months, market forces and actions by the Reserve Bank of India have kept the exchange rate within an ultra-narrow range. Possible remedies include preventing transitory inflation from occasional spikes in commodity prices and guarding against financial risks for businesses with unhedged foreign debt. However, more typical and structural factors suppressing currency volatility are the Reserve Bank of India's shift in preference for accumulating dollars and a possible inclination towards a depreciating Rupee.
Citi cautions that two significant events could impact the Rupee's trajectory:
- Capital inflows following inclusion in key bond indices: The Reserve Bank of India is expected to use these inflows to bolster foreign exchange reserves, especially considering the overall policy skepticism towards fixed-income inflows. This could mean that when capital flows in, India may take measures to strengthen foreign exchange reserves to stabilize the Rupee exchange rate.
- Election results: If policy stability during the election period triggers a short-term rebound in the Rupee, this may reflect market optimism about policy stability. Considering this situation, we will explore trading opportunities in the relative value of the Indian Rupee against a basket of currencies (such as the Singapore dollar).
