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India Investment Strategy

5 September 2024

India Market Outlook

Shifting winds

 What is the impact of US

Fed easing on Indian
Key asset class views Performance update

assets?

Important disclosures can be found in the Disclosures Appendix

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1 Investment strategy and key themes

Shifting winds
Our top preferences
• Indian equities scaled new all-time highs in August, despite the lacklustre start
(12-month outlook)
on improving global risk sentiment and strong foreign investor inflows. Over
the past month, the Nifty index is up 2%, underperforming developed markets
Foundation allocation
(MSCI World up 3.8%) but outperforming EM peers (MSCI Asia-ex-Japan up
• Prefer a diversified asset +1.1%). Broader markets outperformed large-caps, with the Nifty Midcap and
allocation Nifty Smallcap index up 1.7% and 2.9%, respectively. The 10-year IGB yield
• In equities: Large-cap equities fell 4bps, while the INR depreciated 0.3%.

• In bonds: Medium and Long- • The strong resilience of risk assets discounts a lot of positives - strong
maturity bonds domestic growth, resilient earnings and government and policy continuity –
which is reflective in valuations. We expect volatility to remain high in the near-
term given elections in the US and key Indian states, escalating geopolitical
Sector overweights tensions and potential growth slowdown. We believe a diversified asset
• Industrials allocation remains a prudent strategy to tide through the uncertainty.

• Financials • Within equities, we are overweight large-cap equities on a higher margin of

safety in terms of earnings and valuations along with stronger balance sheets
• Consumer Staples
to cushion the impact of tighter financial conditions.

• We see an improved risk-reward for bonds on positive supply-demand

12m FX views
balance with the government sticking to the fiscal consolidation path and
• Mildly bearish bias on INR (12- robust foreign investors inflows from index-tracking funds. We are overweight
month) medium and long-maturity bonds and high-quality corporate bonds given
attractive absolute yields. Gold remains a key portfolio hedge.

Key Asset Class Views

Equities ◆ Bonds ◆ Gold ◆ Cash ◆
Developed Markets ▲ Short Maturity ◆
Emerging Markets ◆ Medium/Long Maturity ▲
Indian Equities ◆
Large Cap ▲
Mid/Small Cap ▼

Legend: ▲ Overweight ◆ Neutral ▼ Underweight

India Market Outlook 2

2 Perspectives on key client questions

What is the impact of US Fed easing on Indian assets?

As we approach the start of a potential US Fed easing cycle, we analyse the past to
see how Indian assets performed around the easing cycles and how investors can
position their portfolios to capitalise on this shift.

Bonds – historically a consistent performer. India bonds have generated strong

positive returns around the start of the easing cycle, as yields decline sharply (10Y
IGB yields fell an average 57bps over 3-month ahead of the first rate cut) and
continue to trend downwards over 6 months post the first rate cut.

Equities – positive in early easing but mixed overall. Historically, Indian equities
have traded weak heading into the easing cycle. On average, the Nifty index fell by
about 10% in the 12 months preceding the first cut, unlike what we have witnessed
recently. Performance following the first cut is broadly positive 1-3 months, likely
boosted by improving foreign investor inflows amid a weaker USD but becomes
mixed over 3-12 months as global growth challenges start to emerge.

USD/INR – stable near term. The INR has traded stable heading into an easing
cycle and strengthened modestly over the 1-3 month into the cycle, supported by a
broad decline in the USD (DXY Index) and an improvement in foreign capital inflows.

How different is the current cycle?

The current trend in domestic assets is a marked departure from the previous easing
cycles, except 2007. Over the past 12 months, the Nifty index is up 28%, yield on
10Y IGB is down 35bps while the INR has depreciated 1% against the USD.

In the current cycle, we expect Indian assets to be driven by the evolution in domestic
and global growth scenario and the RBI’s monetary policy response to shifts in
growth-inflation dynamics. The resilience of domestic equities and stretched
valuation premiums discount a lot of positives – strong macro, resilient earnings and
government and policy continuity. This raises the odds of a near-term pull back. We
see an attractive risk-reward for Bonds, given still attractive carry and our view of
lower inflation and a decline in interest rates.

We believe, a diversified asset allocation with neutral allocation to equities, bonds,

gold and cash remains a prudent approach to tide through the near-term elevated
volatility given elections in US and key Indian states, escalating geopolitical tensions
and potential growth slowdown.
Fig. 1 Historically, domestic bonds and INR perform well over 1-6 months from the first Fed rate cut; equities
performance has been mixed beyond the immediate short term
Changes in Nifty index (%), 10Y IGB (bps) and USD/INR (%)

Source: Bloomberg, Standard Chartered.

India Market Outlook 3

6 Macro Overview – at a glance

Key themes

We expect India’s economic growth to stay above its long-term trend and ahead of its major peers over the next 12 months.
Resilient domestic demand, broadening government policy support and focus on capex are tailwinds for growth. In our view,
CPI inflation could surge from the recent lows on fading base effects, but track within the RBI’s inflation target range of 2%-
6% on disinflationary pressures from previous policy tightening, lower food article prices amid prospects of a better monsoon
and likely government policy interventions to manage supply side concerns.

In our assessment, fiscal policy remains the key driver for growth in 2024, as financial conditions are tighter than normal.
Continuity of past policy measures undertaken by the government that include (i) greater public capex spend, (ii) structural
reforms and (iii) incentives to boost manufacturing and infrastructure, supports India’s medium-term growth outlook. In our
view, given underlying strong growth and modest inflationary pressures, the RBI is likely to keep policy rates on hold in early
H2 2024 and cut rates in Q1 2025 as inflation stays close to the medium-term target of 4% or growth impulses slow. However,
the quantum of easing in this cycle is likely to be shallow.

Key risks to our macro-outlook are: 1) Global growth slowdown, 2) Persistent high inflation, 3) Escalating geo-political
tensions.

Key chart
Fig. 2 India’s growth-inflation dynamics stronger than peers
For FY2025, India’s
GDP is expected to grow GDP Growth (Y/Y) and CPI Inflation (Year average) – Bloomberg consensus estimate*
at 6.9% and CPI is 10 9.1 7.2 8.2 6.9 7 6.2 6.6
6.5 6.6
3.9 6 5.4
expected to average 5 4.8 4.8 4.5 4.5
5
4.5%. 4 3.4
% y/y

0
3
% y/y

-5 2
-5.8 1
-10 0
FY19

FY20

FY21

FY22

FY23

FY24

FY25f

FY26f

FY21
FY19

FY20

FY22

FY23

FY24

FY25f

FY26f

Source: Bloomberg, Standard Chartered

Macro views at a glance

Factors View Comments
Economic activity remained strong in August 2024. India’s Manufacturing PMI eased to 57.5 while Services
Economic
◑ PMI rose to 60.9 in August 2024. Industrial production grew 4.2% y/y in June 2024, lower than the 5.9% growth
growth
recorded in the previous month.
India’s consumer price inflation rose to 3.5% in July 2024, lowest reading since August 2019, on high base
Inflation ◓
effect in food article prices. Core inflation rose to 3.4%, close to its all-time low of 3.1% in May 2024.
The government prioritized fiscal consolidation while supporting growth in the latest budget. FY 2025
Fiscal deficit ◓ fiscal deficit is estimated at 4.9% of GDP vs interim budget target of 5.1%. GST collections eased to INR 1.75trn in
August 2024 compared to INR 1.82trn last month.
India’s trade deficit widened to USD 23.5bn in July 2024 compared to USD 21bn in June 2024. Imports rose
External ◓ 7.5% y/y to USD 57.5bn, while export fell 1.5% y/y to USD 34bn. India’s current account recorded a surplus of
USD 5.7bn or 0.6% of GDP in Q4 FY2024 compared to a deficit of USD 8.7 bn or 1% of GDP in Q3 FY2024.
The RBI kept policy repo rate unchanged at 6.5% in its August 2024 policy review for the ninth
Monetary consecutive meeting. The RBI retained its monetary stance of ‘withdrawal of accommodation’ and indicated
◓
Policy flexible liquidity management through two-way actions. Further, the RBI retained its GDP growth forecast for FY
2025 at 7.2% y/y and retained its average inflation forecast for FY 2025 at 4.5% y/y.
Source: Bloomberg, Standard Chartered India Investment Committee

Legend: ○ Not supportive ◐ Somewhat supportive ◓ Balanced ◑ Supportive ● Very supportive

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7 Bonds – at a glance
Key themes
We are neutral on bonds as attractive absolute yields are counterbalanced by below-average yield premiums. Improving bond
demand-supply balance given lower government borrowing, higher RBI dividend and India bonds’ inclusion in the global bond
indices is a tailwind for bonds. We stay overweight medium and long-maturity bonds given their attractive carry and potential for
higher price gains as bond yields fall. We prefer corporate bonds (i.e., bonds that offer a yield premium over government bonds),
especially high-quality (AAA) corporates, given cyclically high spreads.

In our view, the RBI’s prolonged pause on policy rates, indicates the likelihood that bond yields have peaked. We expect 10-
year IGB yield to trade in the range of 6.50%-6.75% over the next 6-12 months. In our assessment, high quality (AAA) corporate
bonds offer a better risk-reward given attractive spreads and improving corporate fundamentals. In addition, India’s real bond
yields are higher compared to most Emerging Market (EM) peers.

However, three factors for bonds remain unfavorable: 1) High fiscal deficit over the medium-term, 2) Tight banking system
liquidity and lack of outright support from the RBI, and 3) A populist tilt in government policy focus could drive inflation higher.

Key chart
Fig. 3 India’s real yield is better than most peers
India’s real yield is better than
most peers. 10-year government bond yields (%)

6.0 5.6

5.0 4.5
4.0 3.4
3.0
2.1 2.0 2.0
2.0
0.8
1.0 0.5
0.0
Mexico Brazil India Indonesia Malaysia South Thailand China
Korea

Source: Bloomberg, Standard Chartered.

Bond views at a glance

Factors Views Comments
India’s inflation-adjusted yield is better than most Emerging Market peers. The 10-year IGB real yield
Real Yields ◓
at 3.4% is below the average real yield of 2.5% for other major EMs.
Government bond supply dynamics have turned favorable. The government pegged its gross
Supply dynamics ◑ borrowing for FY 2025 at ~INR 14.0trn compared to INR 15.4trn in FY 2024. Both, FY 2025 fiscal deficit
and government borrowing target was lower than market expectations.
Market expects no rate cuts by the RBI in the near-term. 1-year Overnight Indexed Swap (OIS) spread
Monetary policy ◓
suggests market participants expects the RBI to stay on hold over the next 12 months.
The RBI’s focus remains on withdrawal of excess liquidity. The banking system liquidity remains in
Liquidity ◓ surplus, currently at INR 2.74bn after hitting a deficit of INR 1.6trn in June. Improving government
spending could keep the banking system liquidity benign in H2 2024.

Demand dynamics have improved. YTD 2024, foreign investor inflows are positive and is likely to stay
Demand
◑ robust given India’s bond inclusion in global indices. Demand from domestic institutional investors (banks,
dynamics
insurers and mutual funds) will be a key determinant of bond yields in 2024.

Yield premiums trade below-average. The spread between 10-year IGB yield and repo rate is at 36bps
Yield premiums ◓ vs. 5yr avg. of 154bps. High-quality (AAA) bonds have turned attractive with the yield spread between 3Y
AAA rated bond and 3Y G-sec rising to 85bps, higher than 43bps in Oct 2023 and 10Y avg. of 70bps.
Source: Bloomberg, Standard Chartered India Investment Committee

Somewhat
Legend: ○ Not supportive ◐ ◓ Balanced ◑ Supportive ● Very supportive
supportive

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1 Equity - at a glance
Key themes

We stay neutral on Indian equities. India’s robust domestic growth momentum, strong earnings delivery and robust domestic
investor inflows are counter balanced by stretched valuation premiums, both absolute and relative to peers. We expect volatility
to stay elevated in H2 2024 as the government broadens its policy priorities amid a busy election calendar with assembly polls
in several key States and a tight race to US presidential elections. Within equities, we are overweight large-cap equities given
higher margin of safety in terms of earnings and stronger balance sheets to withstand market transitions.

In our view, Indian equities is likely to be supported by the below positive drivers: 1) GDP growth and earnings outlook remains
robust and is likely to outpace its major peers. 2) Stable inflows from domestic investors driven by inflows into systematic
investment plans and 3) Pace of foreign investor inflows could improve amid strong earnings delivery, and low foreign investor
positioning in Indian equities.

Risks to our positive equity view are: 1) Global growth slowdown and probable downgrades of earnings expectations, 2) Elevated
equity valuations, both absolute and relative to peers, 3) Foreign investor selling amid slowing domestic investor flows

Key chart
Bloomberg Consensus Fig. 4 Indian equities earnings growth expectations remain robust
expectation is for Nifty Consensus estimates for Indian equities (Nifty index) earnings per share growth
earnings to rise by
40 35
11% and 14% in FY
2025 and FY 2026. 30
23
20 15 14.2
% y/y

11 10.9
10 7.6
5.4

0
-2.5
-10
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25f FY26f

Source: Bloomberg, Standard Chartered

Equity views at a glance

Factors Views Comments
Growth-inflation dynamics are government policy focus remain supportive of equities. Growth
Economic focused fiscal policy, improving real income levels and broadening growth momentum is likely to support
◑
environment corporate profitability. Volatile food article prices amid skewed rainfall distribution and weather
disruptions, remains a key risk.
Earnings growth expectations are robust. Nifty index delivered 23% EPS growth in FY 2024,
Earnings growth ◑ significantly ahead of estimates. Bloomberg consensus earnings growth expectations for the Nifty Index
for FY 2025 and FY 2026 stands at 10.9% and 14.2% respectively. EPS estimates for large-cap equities
(Nifty index) have been positive over the past 3-months.
Valuations stretched. Nifty 12-month forward P/E at 21x, is below its peak of 23x, but higher than its
Valuations ◓ long-term average of 18x. Price-to-book value ratio (P/B) at 4.1x and Market cap to GDP ratio at ~151%,
are above long-term averages. Mid-cap 12-month forward P/E trades are at peak 60% premium to large-
cap equities, significantly higher than its 10-year average premium of 20%.

Foreign investors remain buyers post the general election results. YTD 2024, foreign investors
have bought about USD 6.1bn worth of equities compared to USD 21bn inflows in CY 2023.
Flows ◓
Domestic institutional investors remain buyers in 2024. YTD 2024, domestic institutional investor
inflows touched an all-time high are at USD 37.3bn, compared to USD 22.3bn inflows in CY 2023.

Source: Bloomberg, Standard Chartered India Investment Committee

Somewhat
Legend: ○ Not supportive ◐ ◓ Balanced ◑ Supportive ● Very supportive
supportive

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16 Foundation: Asset allocation summary

View vs. Moderately Very

Summary Conservative Moderate Aggressive
SAA Aggressive Aggressive
Cash ◆ 25.0 5.0 5.0 5.0 0.0

Fixed Income ◆ 55.0 55.0 40.0 25.0 15.0

Equity ◆ 15.0 35.0 50.0 65.0 80.0

Commodities ◆ 5.0 5.0 5.0 5.0 5.0

Level 1 Level 2 Level 3

Cash & Cash

◆ 25.0 5.0 5.0 5.0 0.0
Equivalents

Short-term
◆ 36.4 30.9 25.3 15.2 8.9
Bonds
Fixed Income
Mid/Long-
▲ 18.6 24.1 14.7 9.8 6.1
term Bonds
DM Equity ▲ 2.5 5.0 7.5 10.1 12.6
Asia Ex-
Japan /
◆ 1.4 2.8 4.2 5.6 7.0
Other EM
Equity Equity
Indian Large-cap
▲ 9.2 22.8 32.0 41.3 50.5
Equities equities
Mid/small-
▲ ▼ 1.8 4.4 6.2 8.0 9.8
cap equities
Commodities
◆ 5.0 5.0 5.0 5.0 5.0
(INR Gold)
100 100 100 100 100

▼ Underweight ◆ Neutral  Overweight

Source: Bloomberg, Standard Chartered

All INR converted exposure. For illustrative purposes only. Please refer to the disclosure appendix at the end of the document

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16 Performance of our calls

Open calls Open date Close date Absolute Relative
Equities

Indian large-cap equities to outperform mid-cap and small-cap equities 18-Dec-23

Bonds

Indian mid-and long- maturity bonds to outperform short-maturity bonds 18-Dec-23

Open calls Open date Close date Absolute Relative

Equities

Indian equities to outperform all other asset classes 18-Dec-23 5-Jun-24

Source: Bloomberg, Standard Chartered. Performance measured from 18 December 2023 (release date of our 2024 Outlook) to 4 September
2024 or when the view was closed.
Legend: – Correct call; – Missed call; n/a – Not Applicable.
Past performance is not an indication of future performance. There is no assurance, representation or prediction given as to any results or
returns that would actually be achieved in a transaction based on any historical data.

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18 Market performance summary*

Source: MSCI, NSE, S&P BSE, Crisil, Bloomberg, Standard Chartered

*2024 YTD period from 31 December 2023 to 4 September 2024. 1-month period from 6 August 2024 to 4 September 2024.

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India Market Outlook