India Perspectives - Decisive steps to tackle the external headwinds

Highlights: Elevated oil prices and the potential impact from El Nino continue to be headwinds for India, leading us to downgrade FY27 GDP growth forecast to 6.0 per cent. We are neutral on INR local bonds despite recent tax cut and attractive yield on offer, as higher inflation and the potential for greater supply lead to a balanced risk-reward. We retain our tactical mild underweight stance on Indian equities, as they are likely to struggle to outperform global equities until oil prices stabilise.

• The recent measures announced by the RBI and the government to scrap taxes for bond investors, increase limits for foreign equity investors, and provide hedging support for External Commercial Borrowings and FCNR deposits are positive and should help improve the sentiment at the margin
• The Reserve Bank of India (RBI) kept interest rates unchanged at 5.25 per cent in the June Monetary Policy Committee (MPC) meeting, while downgrading the GDP growth and increasing inflation forecasts. We now expect the RBI to hike rates by 25bps in its August MPC followed by another rate hike in the October meeting, bringing the repo rate to 5.75 per cent
• We retain our tactical mild underweight stance on Indian equities, as modest earnings growth, relatively expensive valuations and persistent outflows continue to be near-term headwinds. We therefore favour more defensive large-cap stocks. We also prefer domestically oriented sectors and are overweight Financials and Industrials
• We are neutral on Indian local currency bonds. Altough the recent tax cuts and expansion of FAR-eligible bonds are positive, looming RBI rate hikes and risk of higher supply are likely to temper investor enthusiasm. We are bearish on INR, as persistent outflows and concerns about a wider current account deficit are likely to weigh on the currency in the near-term.