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Informist, Wednesday, Dec. 11, 2024

 

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--Axis Bank: Remain overweight on Indian financial sector for 2025 
--Axis Bank:See more FPI outflows in early 2025 on elevated US Treasury ylds 
--Axis Bk: Expect corporates to announce more EPS cuts post Oct-Dec earnings 
--Axis Bk:Don't see room for MPC rate cut by FY26 end on high food inflation 
--Axis Bank: See credit growth improving from here, aiding economic rebound 
--Axis Bk:Low credit growth on RBI lending curbs hurting invest, consumption 
--Axis Bank: See RBI's repo rate steady at 6.50% by end of FY26 
--Axis Bank: See India 10-year gilt yield at 6.60% by end of FY25 
--Axis Bank: See India 10-year gilt yield at 6.50% by end of FY26 
--Axis Bank: See India rupee at 85.50 a dollar in FY25 
--Axis Bank: See India rupee at 86.50 a dollar in FY26 
--Axis Bank: See govt's fiscal deficit at 7.0% of GDP in FY26 
--Axis Bank: See India CAD at 1.1% of GDP in FY26 
--CONTEXT: Axis Bank details its economic and market outlook for 2025 
--Axis Bank: See India average CPI inflation at 4.5% in FY26 
--Axis Bank: See India GDP growth at 7.0% in FY26

 

MUMBAI – Axis Bank expects no cut in repo rate by the Reserve Bank of India's Monetary Policy Committee till the end of 2025-26 (Apr-Mar), owing to high inflation, particularly food inflation, and robust growth. Currently, the RBI's repo rate stands at 6.50%.

 

"Given that food inflation will keep headline inflation elevated, our expectation is that by FY26 we will be at 4.5% (inflation), and as growth will also remain supported, we think that there may not be immediate rate cuts in FY26," said Neelkanth Mishra, chief economist at Axis Bank, at the bank's Economic and Market Outlook event on Wednesday.

 

The private bank expects India's headline retail inflation to average 4.5% in FY26 and GDP growth at 7.0%. "The growth rebound we expect for India, with an above-consensus 7% in FY26, is primarily dependent on local policies. The 1HFY25 (Apr-Sept) slowdown was driven by unintended fiscal and credit tightening," the bank said. India's GDP growth slowed to a five-quarter low of 6.7% in Apr-Jun, and fell further to 5.4% in Jul-Sept. 

 

Further, outlining the reason for the recent slowdown in banks' credit growth, Mishra said that much of the moderation might be due to the Reserve Bank of India's curbs on personal loans and the crackdown on microfinance loans. The bank said that the effect of the RBI's norms was broad-based and impacted all sectors and not just the ones the regulator had targeted.

 

"The regulator is worried about the strong growth in unsecured personal loans, credit card debt, and growth in the microfinance sector. It has taken several measures to slow down growth in these categories and has largely been successful. However, the tools used have been so broad based that loans excluding these categories have slowed too and growth in credit to infrastructure is now close to zero..." the report said.  

 

Last November, the central bank increased the risk weights on exposure to consumer credit, including personal loans, of commercial banks and non-bank lenders to 125% from 100%. It also increased the risk weight on credit exposure of banks to non-banking finance companies by 25%, over and above the risk weight associated with the rating of these NBFCs.

 

Going forward, Axis Bank expects credit growth to improve, backed by better liquidity conditions, owing to the cut in cash reserve ratio, and improved government spending. However, some more macroprudential easing in the form of other liquidity easing measures may be required to fully normalise the credit growth, the report said.  

 

Mishra said that the bank remains overweight on the financial sector for the next year as he expects the recent rise in non-performing assets to subside and sees better credit growth for the sector due to improved liquidity conditions. 

 

MARKETS

The bank expects earnings of Indian corporates to remain under some pressure in Oct-Dec as well, Mishra said. They also expect companies to announce cuts in their expected earnings-per-share ratios while declaring results for the quarter. 

 

Talking about the pressure on Indian equities and broader markets in general due to outflows of foreign funds, Mishra said that it was on account of elevated yields in the US, and the outflow is expected to continue in the near term. Yield on the benchmark US treasury 10 year note has risen from 3.63% in September to around 4.40% in November, making it more attractive for investors with low risk appetite. 

 

However, he sees the outflow as a positive too, because venture capitalists who had invested in India years ago are able to book profits and leave with ease, giving way to more such potential investments in the country, Mishra said. 

 

Mishra also said that he was not too concerned about outflows from Indian government bonds as local demand will keep prices up. The bank sees yield on the 10-year Indian government bond falling to 6.60% by the end of the current financial year and to 6.50% by the end of FY26. "Demand for bonds locally will be strong but supply will remain flattish...the RBI may have to resort to purchase of bonds to keep liquidity conditions better which will again boost demand for local bonds. If the US yields were not expected to rise, I would have expected our yields to fall to 6.25%," Mishra said.

 

Speaking about the outlook for the local currency, Mishra said that the bank expects the rupee to depreciate and experience heightened volatility on account of likely trade tariff that US President-elect Donald Trump has announced to impose on some countries. "The INR was characterised by being extraordinarily stable through 2024, with implied volatility falling to record lows and breaking away from peer FX market volatilities. With significant volatility possible in the coming quarters, not just due to US policies but also second-order effects, say due to a bigger-than-expected move in the CNY (chinese yuan), the INR is likely to become more volatile," the report said. 

 

The bank expects the rupee to touch 85.50 a dollar level by the end of the current financial year and 86.50 a dollar level by the end of the next financial year, it said. 

 

Even as the bank expects the general government--states and Centre--fiscal deficit to trend near 7.0% in FY26, it expects the centre to meet its target of 4.5% fiscal deficit in the same period. "We expect the central government to stick to its target of FY26 fiscal deficit ratio of 4.5%, implying some more headwinds to growth next year, though likely to be only 30-40 bps of GDP," the report said. 

 

The bank sees India's current account deficit inching up to 0.8% in the current financial year. In FY26, the current account deficit may widen to 1.1%, the bank said. India's current account deficit widened to $9.74 billion in Apr-Jun, according to data released by the Reserve Bank of India. The current account was in a surplus of $4.59 billion in Jan-Mar, while it was in deficit of $8.95 billion in the first quarter of 2023-24 (Apr-Mar).

 

In percentage terms, the current account deficit in Apr-Jun amounted to 1.1% of GDP, slightly higher than 1.0% in Apr-Jun 2023. The widening of the deficit, the RBI said, "was primarily due to a rise in merchandise trade deficit" during the quarter to $65.12 billion from $56.70 billion a year ago.  End

 

US$1 = INR 84.83

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Kabir Sharma and Pratiksha

Edited by Akul Nishant Akhoury

 

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