India Perspectives - Hunkering down amid trade challenges

Highlights: India’s economic growth is caught in a tug-of-war. While the imposition of 50 per cent US trade tariffs is a negative for exports and growth, the upside surprise in Q2 GDP data, recent sovereign credit rating upgrade by S&P and the announcement of overhaul of Goods and Services Tax (GST) regime to boost growth offer rays of optimism. We retain our mild overweight on Indian local currency bonds. Given the external headwinds and slowing earnings growth, we take profit on our overweight on Indian equities and trim the positioning to Neutral. 

• While the 50 per cent US trade tariffs have the potential to dent Indian GDP growth by around 0.7 per cent over the next year, we are encouraged by the upside surprise in Q2 GDP data and the recent announcement to rehaul of the Goods and Service Tax (GST) regime which should boost short-term domestic consumption and has the potential to boost India’s long-term growth potential
• With rising risks to growth and undershoot of inflation, we expect the Reserve Bank of India (RBI) to cut rates by at least 25bp in Q4 2025
• We are bullish on Indian local currency bonds. We view the sharp rise in yields after the GST overhaul announcement as temporary and expect further RBI rate cuts and resumption of foreign demand to drive 10-year yields towards 6.0 per cent. Despite cheap fundamental valuations, the heightened geopolitical risks are likely to keep USD/INR elevated in the near-term. We expect USD/INR to gradually approach 87.0 by end-2025
• We take profit on our mild overweight on Indian equities and trim the positioning to Neutral. While Indian equities benefit from robust economic growth, strong domestic demand and continue to offer low correlation to global equities, we see lower probability of them outperforming global equities, given the elevated valuations and declining earnings growth expectations. Within Indian equities, we retain our preference for Large-cap stocks. We favour domestically oriented sectors which should be relatively more resilient. We are overweight on consumer discretionary, financial, industrials and healthcare sectors