7 March 2024, 2:50PM UTC

Chief Investment Office GWM

Investment Research

India monthly outlook

Investing in India
Author: Premal Kamdar, Analyst, UBS Securities India

• We believe India offers the best structural growth

story among other large economies. Combined with
political stability and supportive government policies,
India remains in a favorable position and is most
preferred in our Asia ex-Japan asset class preferences
among equities.
• We expect the Indian equity market to remain
volatile in the near term as geopolitical and economic
risks remain elevated. However, we recommend
investors use any steep market corrections as buying
opportunities given the long-term structural growth
opportunities. We prefer domestic economy linked
sectors as they should benefit from India's superior Source: UBS
economic growth.
• Within fixed income, we believe Indian bond yields
will likely remain range bound in the near term.
Given the flatness of the yield curve, medium- to
long-duration bonds appear attractive as the elevated
levels offer good carry with duration over the next 12
months, in our view.
• We expect the INR to strengthen against the USD,
supported by an improving trade balance, healthy
forex reserves, stable oil prices and anticipation of FPI
inflows in debt (supported by index inclusion) and
equities (on reversal of interest rate cycle).

India’s GDP growth has been surprising positively, averaging
above 8.0% in the first three quarters of FY2024. We
expect this momentum to continue as cyclical recovery
and structural improvements remain in play. That said, the
current global conditions may cause growth to moderate.
Even after factoring in any slowdown, we believe India could
still deliver 7% growth in FY2025.
risk premium falls. We believe the beginning of the rate cut
cycle will also be positive for fixed income markets and see
a good opportunity to add duration. We prefer medium to
long duration bonds. Lastly, we believe the INR could remain
resilient, supported by a stable external deficit and rising
forex reserves.

While India’s stock market valuation is one standard

deviation above its 10-year average, we believe downside
risks are manageable amid a supportive domestic macro and
micro environment. Additionally, we believe the reversal of
the rate cycle could be valuation supportive as the equity

This report has been prepared by UBS Securities India. Please see important disclaimers and disclosures at the end of
the document.
Investing in India

Key policy trends

• The fiscal deficit narrowed in January. The fiscal data
released for January shows government tax revenues
grew 16.5% y/y in January, while the April to January
2024 (FYTD) run rate was around 79% of the revised
budget estimates. On the other hand, government
expenditures fell by 14.0% y/y in January, while the
FYTD run rate was around ~75% of the revised budget
estimates. The FYTD fiscal deficit stood at 63.8% of the
revised estimates, narrowing from the previous year’s
67.8% led by tax collections and a decline in capital
Key economic data trends expenditures.
• India’s GDP growth surprised positively. India's real Outlook
GDP of 8.4% for 3QFY24 surprised positively, and
• We believe that India is likely to remain one of the
against expectations of a moderation during the quarter.
fastest growing global economies. However, we expect
The upside surprise was driven by a sharp jump in net
GDP growth to moderate due to global (weaker growth)
indirect taxes (+32% YoY). Meanwhile, the real gross
and local factors (softness in public capex). From 7.6%
value add (GVA), which excludes the impact of indirect
y/y growth in FY24E, we expect real GDP growth
taxes, decelerated to 6.5% (from 7.7% in Q2) and was
to moderate to 7.0% and 6.8% in FY25 and FY26
in line with our expectations. The details show that
respectively. Sector-wise, we expect some moderation in
investment growth (+12.2% y/y) remained robust in the
investment-led growth due to lower public capex, while
December quarter, while consumption growth (+2.7%)
see a gradual recovery in consumption growth driven by
remained soft.
a recovery in rural growth on expectations of a normal
• Lead economic indicators suggest continued monsoon (as projected by IMD).
resilience. The UBS India Composite Economic Indicator
(UBS India-CEI), a leading indicator using 15 high-
Figure 2: India real GDP growth
frequency data points, suggests sequential improvement
of 1.1% m/m in economic momentum on a seasonally
adjusted basis in January. Moreover, the recent survey
data showed demand conditions remain robust with
manufacturing PMI’s in February rising to a five-month
high of 56.9.

Figure 1: UBS India CEI

Source: CEIC, Haver, National Statistics, UBS forecasts, as of March 2024

Note: 31 March ending is Fiscal year ending

Source: UBS as of March 2024

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Investing in India
Equity performance and valuation
• The Nifty 50 index has risen 3.1% ytd and recently
recorded a new all-time high on the back of strong
macro, healthy corporate earnings and steady domestic
institutional investor (DII) buying. The Nifty 50 index
currently trades at a 12-months forward P/E of 20.5x,
one standard deviation above its 10Y average.
Figure 3 - Nifty PE valuation (12 months forward)
Source: Bloomberg, UBS as of March 2024
Key trends
• Earnings remain healthy. Q3 earnings growth
moderated from the strength seen in the previous
two quarters but remained healthy and in line with
consensus. The 3QFY24 PAT for the Nifty 50 companies
grew 16.3% y/y (vs. 32.2% in Q2) driven by a
robust performance of the domestic cyclical sectors
and continued margin tailwinds. However, with most
margin tailwinds baked in, further margin expansion
appears limited. While margins have started to peak,
we expect earnings growth could be anchored around
topline growth in the coming quarters. Based on these
assumptions, we expect the Nifty earnings growth of
14% and 12% for FY25 and FY26 respectively.
• DII ownership of Indian equities getting closer
to FPIs. Recent shareholding patterns suggest the FPI
ownership of India equities (BSE500 index) of ~17.8%
remains at a decade low, while DII’s share has reached
a record high of ~14.3% supported DII inflows. The
gap between the FPI and DII ownership has narrowed
to just 3.5%, which suggests the dominance of FPI
flows on Indian equities is shrinking. However, with
FPI ownership at a decade low, we do not anticipate
significant outflows from current levels.
Figure 4 - BSE500 index shareholding ownership
pattern
Source: NSE, Capitaline, UBS, as of December 2023
Outlook
• After a strong run up of Indian equities, some profit
taking in the near term cannot be ruled out as economic
and geopolitical risks remain elevated. Nevertheless,
India remains in a sweet spot, in our view, and we
recommend investors to use any corrections as buying
opportunities given the long-term structural growth
opportunities that exist.
• The most common pushback on India is its premium
valuation. We believe the premium valuation is
justified by cyclical and structural tailwinds, and further
supported by political stability. Additionally, valuations
get support from falling equity risk premium as interest
rates fall. Given this backdrop, we believe India’s high
valuation is sustainable. We expect the Nifty index to
reach 25,200 by Mar-25, implying an upside of 12%.
The Nifty target is based on Mar-26 EPS estimates of
INR 1,226 and a 12 month forward target PE multiple
of 20.6x.
• We like autos, industrials, utilities, real estate, consumer
durables and healthcare sectors that have high domestic
exposure. We are neutral on Financials, FMCG, IT, Oil &
Gas, and Chemicals, while we are least preferred on the
metals and telecom sectors.
Risks
• Key risks for Indian markets include unfavorable election
outcomes, a delay to the start of the rate cut cycle
and geopolitical tensions in the Middle East (surge in oil
prices).
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Investing in India
Change in bond yields
• 10-year US bond yields have surged by 33bps ytd on
risks of a delay to the rate cutting cycle and a still hot
labor market. Indian bond yields, in contrast, have seen
a diverging trend, with the 10-year Indian Government
bond yield falling 11bps ytd to 7.06% amid ongoing
optimism about Indian government bond inclusion in
the global bond index, further boosted by lower-than-
expected net borrowing targets in the FY2025 interim
financial budget.
Figure 5 - Government bond yields (%)
Source: Bloomberg, UBS as of March 2024
Key trends
• FPI inflows surge in India’s debt market. The
inclusion of India’s government bonds in the JP Morgan
Global Bond Index in June 2024 and in the Bloomberg
index in January 2025 has fueled optimism among
foreign investors as seen in the surge in FPI flows (USD
4.8bn ytd) into Indian debt markets.
• Inflation moderated in January. Headline CPI inflation
decelerated to 5.1% ytd (consensus at 5.0%) in January
(vs. 5.7% in December) driven by easing food prices.
Meanwhile, core inflation continued its downtrend
and was the lowest since November 2019. A drop
in January’s core inflation to 3.6% ytd (vs. 3.9% in
December) was due to a broad-based decline across
goods and services inflation. We expect headline CPI and
core inflation to ease further on a gradual pull back in
food prices and contained core inflation, but supply side
shocks add upside risks.
Figure 6 - India CPI inflation and repo rate
Source: Bloomberg, UBS as of February 2024
Outlook
• On the policy front, the RBI may continue with its
hawkish hold on rates as GDP growth remains strong
and inflation remains above target with repeated food
spikes posing upside risks. The continuous repricing of
Fed easing path could also weigh on the RBI’s decision
to start its rate cut cycle. We believe that the RBI could
act in the June quarter by shifting its stance to neutral
followed by a cumulative 50bps rate cut in the second
half of the year. Although the RBI remains cautious, fiscal
consolidation and bond-index-inclusion-related inflows
will likely see bond yields fall over the coming months.
We expect the 10-year Indian government bond yield to
decline to 6.25% by March 2025.
• Given this backdrop, we prefer medium- to long-
duration bonds. Historically, turning positive on the long-
duration bonds well ahead of the first-rate cut has
reaped returns. Thus, we believe it is a good time to
add long-duration Indian government bonds and AAA
corporate bonds.
Risks
• Key risks for the Indian bond market include a delay
to the start of the US rate cut cycle, supply shocks
due to geopolitical tensions, higher food inflation
due to adverse weather conditions, and any negative
developments toward index inclusion.
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Investing in India

Outlook
• We expect India’s current account deficit to narrow to
0.8% of GDP in FY24E on the back of an improving
trade deficit. Heading into FY25, it modestly increases
to 1.3% of GDP on slowing global growth and
supported domestic demand. Overall, we expect the
current account deficit to remain well contained, thereby
supporting the INR in our view.

Figure 8: India's current account deficit

Performance
• The DXY index has strengthened ~3.0% since the start
of the year given strong January labor market and US
inflation data. Despite a stronger USD, the INR has stayed
relatively stable and appreciated by 0.4% ytd against the
USD. The Indian currency also outperformed most of its
Asian peers over the same period.

Figure 7 - Asian currency performance against the

USD

Source: Bloomberg, UBS forecasts as of March 2024

• Our global investment committee expects the US Fed

to start cutting rates this year. A rate cut cycle drives
weakness in the USD and tends to benefit emerging
market currencies, resulting in higher foreign inflows.
This backdrop, combined with India’s resilient domestic
economy, improving trade fundamentals, and healthy
forex reserves should strengthen the INR outlook. We
expect the INR to appreciate versus the USD over the
Source: Bloomberg, UBS as of February 2024
next 12 months.
Key trends Risks
• India’s trade balance improves in January. The • Key risks include a delay to the start of the rate cut cycle
services trade surplus reached an all-time of USD 16.8bn and a spike in crude oil prices above USD 100bbl, whih
in January driven by strong growth in services exports would lead to a detrioration in India’s trade balance.
(+17% y/y). Meanwhile, the goods trade deficit fell by
USD 2.3bn in January to USD 17.5bn (vs. USD 19.8bn
in December), largely driven by a broad-based decline in
imports. Overall, an improvement in January’s trade data
should provide a cushion for the current account deficit,
thereby supporting the INR in our view.
• India has healthy forex reserves. India’s forex reserves
of USD 619bn are currently the fourth largest globally
with an import cover of 11 months and 1.02 times
external debt. The forex reserves provide sufficient
headroom for the RBI to protect the Indian currency from
sharp depreciation during volatile times.

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Investing in India

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