India Perspectives - Staying the course amidst improvement in growth outlook

Highlights: After and eventful August which saw imposition of 50 per cent US trade tariffs, September was marked by signs of progress in trade talks and finalization of the GST overhaul which should boost domestic consumption. As a result, we upgrade our GDP growth forecast for 2025 to 7.2 per cent. We retain Neutral stance on Indian equities given still elevated valuations, modest earnings growth and mixed technicals. We are bullish on INR local currency bonds as we expect yields to decline. 

• In the near-term, the boost to consumption from the GST cuts should largely offset the impact of US tariffs, which combined with statistical factors should lead to stronger GDP growth. Hence, we upgrade the 2025 GDP growth forecast to 7.2 per cent (from 6.7 per cent previously) and 2026 forecast to 6.3 per cent (from 6.2 per cent previously)
• Following the recent RBI meeting, where it shared its projection that inflation should remain below 4 per cent till 4QFY27, we expect the central bank to cut rates by 25bps to 5.25 per cent in the December Monetary Policy Committee (MPC) meeting
• We are Neutral on Indian equities as we assess that the upside and downside risks are largely balanced. While the GDP growth is robust, earnings continue to be the biggest drag for the equity market, with elevated risk of downward revision of 2026 earnings expectations. When we combine this with the still elevated valuations and mixed flows, the struggle to see catalysts for Indian equities to outperform regional and global peers. We retain our preference for Large-cap stocks. We favour domestically oriented sectors and are overweight on consumer discretionary, financials, industrials and healthcare sectors
• We are bullish on Indian local currency bonds. We view the current yields as an attractive entry point as expect the benchmark 10-year yields to decline driven by reduction in supply concerns, robust domestic demand, RBI rate cuts and potential resumption of foreign flows. We are neutral on INR and expect USD/INR to edge towards 87.0 by end-2025. In our view, the INR has largely priced in the tariff risks