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Bulls and Ballots: Analysing your Investment dynamics Amidst Election

Optimism in India’s growth shows little signs of slowing, but policy continuity will be crucial if it wants to see strong growth. 

With China’s economy slowing, India is likely to be the fastest growing Asian economy this decade. Irrespective of the election outcome, policy continuity and a focus on macroeconomic stability are important growth underpinnings.

But how is the current metrics paining such a trajectory.

Indian Economy

Current Account Improvement : India's current account deficit (CAD) saw a positive trend, narrowing to 1.2% of GDP in Q3FY24, down from 1.3% in the previous quarter and 2% a year earlier. This improvement was fueled by a record-high services surplus and increased income account inflows.

  • The $10.5 billion current account gap last quarter, lower than expected, was largely due to India's services surplus soaring to an all-time high of 5% of GDP. This surge was propelled by robust exports in software, business, and travel sectors.

  • Additionally, private transfer receipts, mainly remittances from overseas Indians, rose by 2.1% year-on-year to $31.4 billion.

Significantly, India's current account balance, excluding oil and gold imports, surged to a surplus of 3.3% of GDP from 2.9% a year ago. This indicates a healthy underlying external position, despite the challenges posed by high commodity prices.

Capital Flows and Forex Reserves :Capital inflows moderated to 1.9% of GDP from 3.5% in the same quarter last year. While FDI and FPI inflows picked up, overall flows were dampened by lower "other investments". This resulted in lower forex reserve accretion of $6 billion in Q3FY24 compared to $11 billion last year. 

The domestic savings rate also increased to a healthy 28.3% of GDP in Q3FY24. The improvement in India's external and domestic imbalances bodes well for macroeconomic stability. 

Government Finances: The total spending increased by 7.3% year-on-year, with 80% allocated to capital expenditure. Total receipts grew by 10.1%, supported by strong personal income tax collections.

With the economy expected to slow, achieving next year's ambitious 11.6% growth in gross tax revenues will be crucial. In this context, the strong 11.5% rise in GST collections to a record 􏰂1.78 trillion in March 2024 is encouraging. 

Indian Equity

A notable trend in India's growth story is the improvement in capacity utilization, largely driven by cyclical and capital- intensive sectors such as auto, metals, capital goods, cement, and petroleum products. This suggests that corporates are investing to keep pace with rising demand. Capacity utilization stood at a healthy 74% in Q2 FY24 and is expected to have risen further based on the surge in manufacturing PMI during Q4 FY24.

The uptick in volumes is primarily led by sectors related to manufacturing and infrastructure, rather than fresh capacities, indicating that the private capex cycle is still in its nascent stages. On the flip side, consumption-linked sectors are witnessing muted volume growth, with some segments like apparel, furniture, electronics, wood, tobacco, and chemicals even seeing a sharp slowdown.

Corporate Profitability & Investment Outlook: The corporate profit upcycle in India is showing signs of sustainability. While the current pace of expansion may moderate, double-digit profit growth is still likely, given benign commodity prices and rising demand. Importantly, corporate balance sheets are healthier than in previous cycles, with companies having raised resources from equity markets, keeping leverage under check.

Indian Debt

According to Crisil Rating Study, there are three factors driving credit quality of corporates in Fy24 :

  • Deleveraged Balance Sheets

  • Sustained Domestic Demand

  • Government Driven Capex

  • Sectors leading the upgrades include Infrastructure linked sectors, automotive (auto) components, education Sectors that saw downgrades include export-oriented sectors like textile, marine products and agricultural products like edible oils due to global headwinds Credit opportunities in India: With India's improving fundamentals and government promotion of private credit, the credit cycle in India has been on an upswing, offering opportunities in credit risk funds.

With the upcoming rise in debt opportunities, we continue to hold an increased duration in the fixed-income portfolio to capitalize on the softening of yields in the next 1-3 years.

We continue to hold our view to increase duration in the fixed income portfolio so as to capitalize on the softening of yields in the next 1-3 years

  1. 65% - 70% of the portfolio can be invested in combination of G-Sec roll down strategies through a combination of 10 - 14 years' maturity Bonds/Funds and for 20 to 30 years' average maturity prefer to invest through G-Sec MFs.

  2. Equity Savings funds which aim to generate enhanced returns than traditional fixed income along with moderate volatility through a combination of equities, arbitrage and fixed income instruments. 2.To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to select high yield NCDs, Private Credit strategies & REITs/InvITs. 

3. For liquidity management or temporary parking, investments can be allocated to Floating Rate (min 9 – 12 months) Arbitrage/Ultra Short Term (min 6 months)/Liquid (1-3 months)/Overnight (less than 1 month) strategies.

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