India Perspectives - Healthy monsoon trumps cloudy trade outlook

Highlights: India’s domestic resilience and the potential for boost in rural consumption due to healthy monsoon season lead us to upgrade GDP growth forecasts despite elevated global uncertainty. We retain our mild overweight stance on Indian equities and Indian local currency bonds. We are neutral on INR and expect USD/INR to remain largely range bound.

• Despite the ongoing global trade uncertainty, domestic strength leads us to upgrade India’s GDP growth forecast to 6.7 per cent for 2025 and 6.3 per cent for 2026. Lower inflation and rise in rural income should drive robust consumption growth. Continued strength in services exports and supportive monetary policy lead us to be more constructive on the economic outlook
• We expect FY26 inflation to undershoot RBI projections of 3.7 per cent and come in around 3.2 per cent, indicating room for further easing. We now expect RBI to deliver a 25bp cut in December MPC meeting to take the benchmark rate to 5.25 per cent
• We retain our mild overweight stance on Indian equities. The upcoming 2Q25 earnings season would be closely watched, but investors may focus more on corporate guidance than reported numbers owing to trade-related distortions. Domestic demand remains resilient and foreign investor flows have resumed, aided by robust growth prospects and diversification potential. We retain our preference for Large-cap stocks. We upgrade Consumer Discretionary to a preferred sector along with Financials, Industrials and Healthcare
• We are bullish on Indian local currency bonds. We view the rise in yields across the curve after the RBI rate cut as being temporary and expect further RBI rate cuts, lower net supply and resumption of foreign demand to drive 10-year yields towards 6.0 per cent. Elevated credit spreads also offer a good opportunity to add high quality corporate bonds. INR’s underperformance in 2025 has left it with cheaper valuations and stronger macro-economic fundamentals. We expect USD/INR to remain largely range-bound and approach 86.0 by end-2025