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Economic Times
25-06-2025
- Business
- Economic Times
Why is RBI stimulating a healthy economy?
Reuters A Reserve Bank of India (RBI) The Reserve Bank of India's recent jumbo rate cuts took economists by surprise, as many indicators point to an economy chugging along nicely. Why then did the RBI need to frontload monetary stimulus? The RBI on June 6 cut the repo rate by 50 basis points and the cash reserve ratio by 100 bps, while also changing the monetary policy stance from "accommodative" to "neutral," implying that future rate moves could be up or down. The RBI's actions clearly confused investors. After the outsized rate cut, 10-year Indian bond yields actually jumped by around 10 bps, before receding slightly over the following weeks. The confusion surrounding the large rate cuts is understandable, as several high-frequency indicators signal that India has a stable and improving economic trajectory. For one, collection of goods and services tax, a proxy for corporate revenue, has been steadily inching upwards since bottoming out in late 2024. Similarly, monthly E-Way bills, an indicator of goods movement and tax compliance, have been rising by more than 13% year-over-year in the past 12 months. The inflation trajectory appears benign as well. Food inflation, the largest component of Indian CPI, looks set to decline given forecasts for a normal monsoon season and thus a surge in food production. Low food prices would likely support urban consumption, further alleviating growth concerns. What then drove the RBI to cut the repo rate massively and inject an additional 2.5 trillion rupees of liquidity into the banking system through the CRR cut? RBI Governor Sanjay Malhotra partly answered the question in his post-meeting media interactions. He noted that growth was lower than the bank's "aspirations", amid a challenging backdrop of global uncertainty, which compelled the Monetary Policy Committee to ease policy in order to stimulate consumption and investment growth."Global uncertainty" is only part of the story, however. What was left unsaid is that there are multiple signs that Indian consumption could be facing headwinds. First, passenger car sales, a reliable indicator of urban consumption sentiment, remain subdued, with less than 2% year-on-year sales growth in the fiscal year ended March 2025, according to the Society of Indian Automobile Manufacturers, though growth in motorcycle and scooter sales remains strong at 9.1% y/y, implying stronger buoyancy in rural and semi-urban consumption. More ominously, households seem to be financing their consumption by taking on more debt. Indian household debt as a proportion of GDP may not be alarming by emerging markets standards, but it has increased over the past two years from 36% to 42%, according to the Reserve Bank of India. Credit card loans have increased by 50% over the past three years. And the household savings rate has declined as a result, from 24% a decade ago to about 18% now. By lowering borrowing costs and thus reducing cash outlays for mortgages and personal loans, the RBI could relieve some of this household financial stress. And, in theory, the resultant increase in disposable incomes should boost both consumption and investment moving forward. But the RBI's large cuts may not be enough to achieve this outcome. Boosting consumption typically requires raising confidence related to job security and income visibility, not just making money cheaper. To protect against the risk of an ineffective monetary policy move, central banks usually try to keep aside some "dry powder", or room for more stimulus. In a crisis, central banks may pull out the monetary "bazooka", but in normal times, central banks typically err on the side of caution. The RBI appears to have some ammunition left, but far from what would be ideal. The lowest the repo rate has been over the past decade was during the pandemic when it fell to 4%. That's 1.5 percentage points below the present level. When excluding the pandemic period, the lower bound on the repo rate has usually been only about 50 bps below where it is now. Meanwhile, the cash reserve ratio is already at a record low. This limited monetary space could be an issue, as the RBI may already be considering more stimulus. Governor Malhotra recently suggested that more policy space could be opened up if inflation falls below the bank's projections. Fortunately for the RBI, India's consumer inflation seems to be headed that way. Since February, CPI inflation has been resolutely below the RBI target of 4%. With the most recent print of 2.82% in May, inflation could be on its way to a decade low. This is partly because food prices have been moderating and India is increasingly importing more goods from China, which is struggling with deflation. While it looked last week like the Israel-Iran war might complicate this picture by causing an oil price spike, that now seems less likely following the announcement of a ceasefire. Of course, the ongoing trade war could also put upward pressure on global prices while also weighing on growth. The RBI's large rate cuts were likely intended to keep India's economy going strong, but making such big moves now means the bank could potentially find it harder to stimulate when the economy really needs it. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, opens new tab and X, opens new tab. (The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific equity research at BNP Paribas Securities.)
Time of India
25-06-2025
- Business
- Time of India
Why is RBI stimulating a healthy economy?
The Reserve Bank of India 's recent jumbo rate cuts took economists by surprise, as many indicators point to an economy chugging along nicely. Why then did the RBI need to frontload monetary stimulus? The RBI on June 6 cut the repo rate by 50 basis points and the cash reserve ratio by 100 bps, while also changing the monetary policy stance from "accommodative" to "neutral," implying that future rate moves could be up or down. The RBI's actions clearly confused investors. After the outsized rate cut, 10-year Indian bond yields actually jumped by around 10 bps, before receding slightly over the following weeks. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Treatment That Might Help You Against Knee Pain Knee pain | search ads Find Now Undo The confusion surrounding the large rate cuts is understandable, as several high-frequency indicators signal that India has a stable and improving economic trajectory. For one, collection of goods and services tax, a proxy for corporate revenue, has been steadily inching upwards since bottoming out in late 2024. Similarly, monthly E-Way bills, an indicator of goods movement and tax compliance, have been rising by more than 13% year-over-year in the past 12 months. Live Events The inflation trajectory appears benign as well. Food inflation, the largest component of Indian CPI, looks set to decline given forecasts for a normal monsoon season and thus a surge in food production. Low food prices would likely support urban consumption, further alleviating growth concerns. What then drove the RBI to cut the repo rate massively and inject an additional 2.5 trillion rupees of liquidity into the banking system through the CRR cut? RBI Governor Sanjay Malhotra partly answered the question in his post-meeting media interactions. He noted that growth was lower than the bank's "aspirations", amid a challenging backdrop of global uncertainty, which compelled the Monetary Policy Committee to ease policy in order to stimulate consumption and investment growth. HIDDEN STRESSES "Global uncertainty" is only part of the story, however. What was left unsaid is that there are multiple signs that Indian consumption could be facing headwinds. First, passenger car sales, a reliable indicator of urban consumption sentiment, remain subdued, with less than 2% year-on-year sales growth in the fiscal year ended March 2025, according to the Society of Indian Automobile Manufacturers , though growth in motorcycle and scooter sales remains strong at 9.1% y/y, implying stronger buoyancy in rural and semi-urban consumption. More ominously, households seem to be financing their consumption by taking on more debt. Indian household debt as a proportion of GDP may not be alarming by emerging markets standards, but it has increased over the past two years from 36% to 42%, according to the Reserve Bank of India. Credit card loans have increased by 50% over the past three years. And the household savings rate has declined as a result, from 24% a decade ago to about 18% now. DRY POWDER? By lowering borrowing costs and thus reducing cash outlays for mortgages and personal loans, the RBI could relieve some of this household financial stress. And, in theory, the resultant increase in disposable incomes should boost both consumption and investment moving forward. But the RBI's large cuts may not be enough to achieve this outcome. Boosting consumption typically requires raising confidence related to job security and income visibility, not just making money cheaper. To protect against the risk of an ineffective monetary policy move, central banks usually try to keep aside some "dry powder", or room for more stimulus. In a crisis, central banks may pull out the monetary "bazooka", but in normal times, central banks typically err on the side of caution. The RBI appears to have some ammunition left, but far from what would be ideal. The lowest the repo rate has been over the past decade was during the pandemic when it fell to 4%. That's 1.5 percentage points below the present level. When excluding the pandemic period, the lower bound on the repo rate has usually been only about 50 bps below where it is now. Meanwhile, the cash reserve ratio is already at a record low. This limited monetary space could be an issue, as the RBI may already be considering more stimulus. Governor Malhotra recently suggested that more policy space could be opened up if inflation falls below the bank's projections. Fortunately for the RBI, India's consumer inflation seems to be headed that way. Since February, CPI inflation has been resolutely below the RBI target of 4%. With the most recent print of 2.82% in May, inflation could be on its way to a decade low. This is partly because food prices have been moderating and India is increasingly importing more goods from China, which is struggling with deflation. While it looked last week like the Israel-Iran war might complicate this picture by causing an oil price spike, that now seems less likely following the announcement of a ceasefire. Of course, the ongoing trade war could also put upward pressure on global prices while also weighing on growth. The RBI's large rate cuts were likely intended to keep India's economy going strong, but making such big moves now means the bank could potentially find it harder to stimulate when the economy really needs it. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, opens new tab and X, opens new tab. (The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific equity research at BNP Paribas Securities.)
Economic Times
16-06-2025
- Business
- Economic Times
12-15% earnings growth likely in FY26-27; PSBs and select commodity stocks offer value: Gautam Duggad
Live Events You Might Also Like: Expect a lot of wealth creation in equity market over next 5 years: Gautam Duggad You Might Also Like: FY26 earnings growth to rebound to 12-13% for Nifty 50 companies: Varun Goel (You can now subscribe to our (You can now subscribe to our ETMarkets WhatsApp channel , Head Of Research, Director - Institutional Equities,, says the fourth quarter of FY25 showed strong earnings. It surpassed previous quarters. Growth reached 10% against a 2% expectation. Most sectors and companies exceeded forecasts. Midcaps led with 19% earnings growth. Largecaps also posted 10% growth. Government capex spending increased significantly in March and April. Commodity prices remain a concern. Overall, a 12-15% earnings growth is expected for further says that despite a significant rally in PSU market capitalization, the PSU index's PE ratio remains elevated at 14-15, exceeding its historical average. Defence stocks are trading at high PE ratios of 40-50, limiting further rerating potential. PSU banks and select commodity stocks are the only areas within the PSU sector offering reasonable valuations.I beg to differ. Q4 was a very strong quarter. The spread, the quality, the number of beats that we have seen in this quarter we have not seen in any quarter of FY25. This is the best quarter of FY25. We have exited a very good momentum. Compared to an expectation of 2%, we got 10% growth. Out of 22 sectors for which we forecast earnings, 19 delivered numbers which are better or ahead of of 300 companies that we forecast earnings for, 220, that is roughly 75% of the coverage universe, have delivered numbers either in line or ahead of expectations. This is a far better number because this number usually is between 60% and 65%. So whichever way you slice and dice the earnings, the fourth quarter was one of the best quarters that we have had both from an absolute earnings point of view as well as the spread and quality and internals of that corporate fact, if you dig slightly deeper, out of the 10% earnings growth, midcaps earnings have grown at 19% in our coverage universe and we cover 100 midcaps. Around 85 to 90 largecaps posted 10% earnings growth. And smallcap earnings were flat, except financials. So, the fourth quarter earnings have set the pace now. We are entering FY26 with a good is a lot of support from the macros coming in. RBI delivering 100 basis point rate cut, government cutting income tax rate, inflation trending close to 3%, that leaves more room for RBI in second quarter of FY26 to cut another 25-50 basis points. Liquidity conditions are improving. GST data is strong. Your E-Way bill numbers are strong. So, 12% to 15% earnings growth is not a very far-fetched expectation to have. Yes, the sectoral mix within that 12-15% expectation that we have might change along the way. Some other sectors will contribute versus what we are thinking right broadly, I would also expect the capex cycle to revive. The large part of FY25 is spent on the slowdown in capex. But look at the March numbers. The government spent Rs 2.4 lakh crore. For context, this number was the total annual spend in FY25 which we now spend in one month. April also began on a strong note. We spent 1.6 lakh crore in capex. So, between March and April, we spent close to Rs 4 lakh crore. Slowly, capex spending will also come back might grow at 10-11% or maybe slightly higher because the government has budgeted about 10% growth for FY26 at about Rs 11.5 lakh crore; we closed at Rs 10.5 lakh crore last year versus budgeted estimate of Rs 10.2 lakh crore. Nobody would have thought that the government will exceed the capex spend for FY25 if you had asked them in February or even the first week of March. So, March came like that big slog over where the government completely achieved the target and exceeded by 2-3%.So, those are some of the contributing factors for earnings in my view. The only place where we have our reservations is on global commodities because they are completely difficult to forecast. The underlying mark to market on the commodity prices basis the moment that we are seeing in commodities that takes a huge toll on Nifty earnings because commodities contribute 20% of the profit pool. If you look at the number ex of commodities, even FY25 Nifty earnings growth is about 10%, and that is giving us the confidence that given the many parameters which are in play at both macro and micro level on consumption, capex, financials, the 12-15% earnings growth that we are projecting for FY25 to FY27 is in the realm of you look at PSUs, there are the cohorts – multiple subsegments within that. There is banking, utility, commodity and defence. If you look at defence, on July 24, the peak defence market cap was close to Rs 11 lakh crore. From there to February 25, the market cap came down to Rs 7 lakh crore, almost a 35% decline. Now between February to June that is a four-month period, the market cap has crossed the previous high of Rs 11 lakh it is almost trending towards Rs 11.5-12 lakh crore. So, there has been a 70% increase in market cap in four months for defence PSUs. A large part of the defence market cap is contributed by PSUs. In the same breath, railways have had a phenomenal rally from 2021 to 2024. The combined market cap of a railway plus defence used to be Rs 2 lakh crore in July '21. It went to Rs 18 lakh crore in July '24. From there, both the sectors had that, defence has rallied and crossed its earlier peak but the Railways is still to cross it. PSU banks have been flatlining for almost a year now. So, where are we positive? We are positive on select PSU banks, which is why I am still overweight on PSUs in our model portfolio in financials, even though our bigger overweight stems from non-lending financials and capital market plays where we are far more bullish. Then, selectively in commodities, we like Coal India, Power Grid. One cannot have a basket approach because of the underlying undervaluation of PSUs prevailing in 2020. A large part of that got corrected between 2020 and 2024.A year-and-a-half back, we had detailed in the PSU strategy note where we said that despite the big rally in the market cap for PSU companies, the PSU index was still trading at 14-15 PE while its average used to be eight-nine times. I do not think the PE has more room for rerating, even in defence stocks now because now even defence stocks are trading at 40-50 PE. The only place where valuations are reasonable in PSU space today is PSU bank and some commodity stocks.
Time of India
16-06-2025
- Business
- Time of India
12-15% earnings growth likely in FY26-27; PSBs and select commodity stocks offer value: Gautam Duggad
Live Events You Might Also Like: Expect a lot of wealth creation in equity market over next 5 years: Gautam Duggad You Might Also Like: FY26 earnings growth to rebound to 12-13% for Nifty 50 companies: Varun Goel (You can now subscribe to our (You can now subscribe to our ETMarkets WhatsApp channel , Head Of Research, Director - Institutional Equities,, says the fourth quarter of FY25 showed strong earnings. It surpassed previous quarters. Growth reached 10% against a 2% expectation. Most sectors and companies exceeded forecasts. Midcaps led with 19% earnings growth. Largecaps also posted 10% growth. Government capex spending increased significantly in March and April. Commodity prices remain a concern. Overall, a 12-15% earnings growth is expected for further says that despite a significant rally in PSU market capitalization, the PSU index's PE ratio remains elevated at 14-15, exceeding its historical average. Defence stocks are trading at high PE ratios of 40-50, limiting further rerating potential. PSU banks and select commodity stocks are the only areas within the PSU sector offering reasonable valuations.I beg to differ. Q4 was a very strong quarter. The spread, the quality, the number of beats that we have seen in this quarter we have not seen in any quarter of FY25. This is the best quarter of FY25. We have exited a very good momentum. Compared to an expectation of 2%, we got 10% growth. Out of 22 sectors for which we forecast earnings, 19 delivered numbers which are better or ahead of of 300 companies that we forecast earnings for, 220, that is roughly 75% of the coverage universe, have delivered numbers either in line or ahead of expectations. This is a far better number because this number usually is between 60% and 65%. So whichever way you slice and dice the earnings, the fourth quarter was one of the best quarters that we have had both from an absolute earnings point of view as well as the spread and quality and internals of that corporate fact, if you dig slightly deeper, out of the 10% earnings growth, midcaps earnings have grown at 19% in our coverage universe and we cover 100 midcaps. Around 85 to 90 largecaps posted 10% earnings growth. And smallcap earnings were flat, except financials. So, the fourth quarter earnings have set the pace now. We are entering FY26 with a good is a lot of support from the macros coming in. RBI delivering 100 basis point rate cut, government cutting income tax rate, inflation trending close to 3%, that leaves more room for RBI in second quarter of FY26 to cut another 25-50 basis points. Liquidity conditions are improving. GST data is strong. Your E-Way bill numbers are strong. So, 12% to 15% earnings growth is not a very far-fetched expectation to have. Yes, the sectoral mix within that 12-15% expectation that we have might change along the way. Some other sectors will contribute versus what we are thinking right broadly, I would also expect the capex cycle to revive. The large part of FY25 is spent on the slowdown in capex. But look at the March numbers. The government spent Rs 2.4 lakh crore. For context, this number was the total annual spend in FY25 which we now spend in one month. April also began on a strong note. We spent 1.6 lakh crore in capex. So, between March and April, we spent close to Rs 4 lakh crore. Slowly, capex spending will also come back might grow at 10-11% or maybe slightly higher because the government has budgeted about 10% growth for FY26 at about Rs 11.5 lakh crore; we closed at Rs 10.5 lakh crore last year versus budgeted estimate of Rs 10.2 lakh crore. Nobody would have thought that the government will exceed the capex spend for FY25 if you had asked them in February or even the first week of March. So, March came like that big slog over where the government completely achieved the target and exceeded by 2-3%.So, those are some of the contributing factors for earnings in my view. The only place where we have our reservations is on global commodities because they are completely difficult to forecast. The underlying mark to market on the commodity prices basis the moment that we are seeing in commodities that takes a huge toll on Nifty earnings because commodities contribute 20% of the profit pool. If you look at the number ex of commodities, even FY25 Nifty earnings growth is about 10%, and that is giving us the confidence that given the many parameters which are in play at both macro and micro level on consumption, capex, financials, the 12-15% earnings growth that we are projecting for FY25 to FY27 is in the realm of you look at PSUs, there are the cohorts – multiple subsegments within that. There is banking, utility, commodity and defence. If you look at defence, on July 24, the peak defence market cap was close to Rs 11 lakh crore. From there to February 25, the market cap came down to Rs 7 lakh crore, almost a 35% decline. Now between February to June that is a four-month period, the market cap has crossed the previous high of Rs 11 lakh it is almost trending towards Rs 11.5-12 lakh crore. So, there has been a 70% increase in market cap in four months for defence PSUs. A large part of the defence market cap is contributed by PSUs. In the same breath, railways have had a phenomenal rally from 2021 to 2024. The combined market cap of a railway plus defence used to be Rs 2 lakh crore in July '21. It went to Rs 18 lakh crore in July '24. From there, both the sectors had that, defence has rallied and crossed its earlier peak but the Railways is still to cross it. PSU banks have been flatlining for almost a year now. So, where are we positive? We are positive on select PSU banks, which is why I am still overweight on PSUs in our model portfolio in financials, even though our bigger overweight stems from non-lending financials and capital market plays where we are far more bullish. Then, selectively in commodities, we like Coal India, Power Grid. One cannot have a basket approach because of the underlying undervaluation of PSUs prevailing in 2020. A large part of that got corrected between 2020 and 2024.A year-and-a-half back, we had detailed in the PSU strategy note where we said that despite the big rally in the market cap for PSU companies, the PSU index was still trading at 14-15 PE while its average used to be eight-nine times. I do not think the PE has more room for rerating, even in defence stocks now because now even defence stocks are trading at 40-50 PE. The only place where valuations are reasonable in PSU space today is PSU bank and some commodity stocks.
