Informist, Friday, Feb. 7, 2025

By Anshul Choudhary

MUMBAI – MUMBAI – The Reserve Bank of India Friday delivered its first interest rate cut in nearly five years and also raised hope of more to follow. However, the only positive the equity market saw in this was that this was the beginning of a deeper rate cut cycle that is needed to spur growth. Benchmark indices ended slightly lower, partly as the rate cut was already factored in by the market, but mainly because even with more rate cuts, growth will take a while to pick up. Indeed, the RBI cut its own Apr-Jun growth forecast to 6.7% from 6.9% and the forecast for Jul-Sept to 7.0% from 7.3%. It estimates GDP will grow at 6.7% in 2025-26 (Apr-Mar), slightly better than the 6.4% growth now expected in FY25, but significantly lower than the 8.2% growth in FY24.

"Pick up in growth will take time and that is why market is not reacting (to the rate cut) as of now," Dr. Joseph Thomas, head of research at Emkay Wealth Management, said. "Post this meeting, there is comfort on the interest rates, liquidity side...but earnings growth remains muted and should take two-three quarters to recover."

Analysts saw a silver lining in the cut in growth projections as well. A cut in GDP projections should be seen as a sign that the repo rate needs to come down to support growth, they said. "They (RBI) have cut rates despite food inflation not coming down...that shows a change in thinking and opens up the possibility of another rate cut in April," Asutosh Mishra, head of research at Ashika Stock Broking Ltd. said.

While analysts expect interest rates to come down further this year, they acknowledged the impact of rate cuts on growth will take a few quarters to fully materialise, and a few more rate cuts as well. Indeed, the consensus on the street is that the economy will need rate cuts totalling 75-100 bps for growth to pick up. "Something like 75-100 bps cuts (including the 25 bps cut Friday) will have a major impact on growth, and that seems possible as inflation is likely to come down and tariff talks might turn out to be just threats," Teresa John, economist at Nirmal Bang Institutional Equities, said.

While market players wait for more rate cuts, the underlying concern is that even these relatively modest growth projections assume that India will not face any major tariffs from the US. Even if India escapes tariff increases from the US, if US President Donald Trump continues to levy more tariffs on other countries, the resultant trade war could delay interest rate cuts in the US as well as in India, analysts said. The new RBI governor, Sanjay Malhotra, was probably bearing this in mind as he said, "continued uncertainties about global trade policies" pose a risk to growth and inflation in India.

Analysts don't expect the RBI's decision Friday to alter the equity market's direction, which is likely to be range-bound for one or two quarters at best, or even fall if growth or corporate earnings don't pick up soon. Equity market players expect foreign investors will continue to sell Indian equities as high bond yields in the US are more attractive, given the high valuations of Indian stocks and the sharp slowdown in earnings growth. Corporate earnings growth has now disappointed for three quarters in a row.

EARNINGS PROBLEM

According to an analysis by Informist, 37 Nifty 50 companies that have reported their December quarter earnings till Wednesday have reported a mere 2.5% on-year growth in their net profits. This widely missed the 10% growth in profit that an Informist poll had expected these companies to report, based on estimates from 22 brokerages. This earnings season, major large-cap companies have not managed to show a recovery in their earnings. This is largely due to weak consumption and lower-than-expected growth in capital expenditure by the government during the December quarter, analysts said.

The corporate earnings reported by companies beyond the top 50 do give some hope, though. The 150 companies out of the Nifty 200 that have reported their numbers so far have reported a 10.2% growth in net profit over the year-ago quarter, just beating the Informist poll estimate of 10%. These companies have also beaten the 4% revenue growth estimate of the poll comfortably by more than a full percentage point. While this is heartening for market watchers, the low single digit growth in revenue does mar the rise in profit.

Analysts see improvement in demand from rural areas. However, the slowdown in demand from urban areas is a concern. To address the weak urban demand, the government has raised tax-free income threshold to INR 1.2 million from INR 700,000 earlier. However, the benefits of this tax relief are also some time away, analysts said. "The impact of tax relief should come only from Q2 (Jul-Sept), but that impact will be limited. Something major needs to happen on the job creation side for things to change drastically," the head of research with a top domestic brokerage said, asking not to be identified.

A slowdown in earnings growth in the past few quarters has laid bare the high stock valuations. Major equity indices have corrected sharply with the Nifty 50 down over 10%, and the small-cap and mid-cap indices down 12-14% from their lifetime highs, touched in September last year. While this correction has made some large-cap stocks attractive, several mid-caps and small-caps are still trading at high valuations, analysts said.

"There is a risk of growth slowing down in India, which is the only risk seen for the market now. Despite the correction, valuations continue to be rich in India...earnings should grow for valuations to become reasonable," Vinit Bolinjkar, head of research at Ventura Securities Ltd., said. End

(With inputs from Anjana Therese Antony)

Edited by Deepshikha Bhardwaj

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