Several high frequency indicators in the Indian economy such as credit growth, index of industrial production, steel production, auto sales, and GST collections are showing signs of a pick-up after bottoming out in the third quarter of 2024, BNP Paribas said in its latest Indian strategy report.

Agriculture gross value added has improved in recent quarters, but growth is muted, it pointed out.

The investment bank also pointed out that in November and December food prices moderated, after spiking during September and October as indicated by the food CPI, which was persistently high during the year.

The NSO has estimated FY25 GDP growth at 6.4 per cent, which implies 6.7 per cent growth in the second half of the current fiscal, compared to 6 per cent in the first half.

Corporate earnings

A major negative factor putting pressure on the economy is slowing corporate earnings in FY25, though valuations remain elevated. BNP Paribas said it expected FY25 earnings growth to moderate to 4-5 per cent as some large sectors, especially oil refining, would see earnings decline.

In the last fiscal year, corporates benefited from a sharp decline in commodity prices that benefited margins. However margin expansion is tapering off, but BNP Paribas said it expected annual revenue growth of NSE 200 companies at 9.1 per cent between FY25 and FY27, led by capital goods, durables, real estate, and retail.

“Consensus expectation is for aggregate margins to contract in FY25 after strong expansion in FY24, and FY26 estimates seem optimistic, with margin expansion assumptions for all sectors,” it said.

Valuations

Equity valuations have been at elevated levels. BNP Paribas said valuation multiples have multiplied, and this was driving Nifty50 returns. The benchmark index is trading at a premium to global peers, which can be partially justified by strong economic growth.

Supply of equities from IPOs, OFS and FII selling has exceeded institutional demand and BNP Paribas said it expected valuations to be capped in the near term. “Continuously rising supply will be negative for equities as most of the DII flows will go in absorbing supply.”

In the equities markets, foreign portfolio investors have been selling persistently as a result of which FPI holdings as a percentage of India’s total market capitalisation is at a 10-year low, while that of domestic institutions is at a high. FII holdings have reduced to 16 per cent, while that of domestic funds has increased, though it is smaller than that of FPIs.

“While India’s dependence on FII inflows has reduced due to its strong domestic flows, FIIs continue to hold $800 billion in Indian equities and their continued selling remains a risk for the market, in our view,” BNP Paribas said.

In seven of the last 10 years, India has received the most inflows among emerging markets, but factors such as rising US yields and expensive India valuations have weighed.

MSCI India is expensive compared to its peers, with both consumer staples and industrials trading at a premium to their historical average price-to-multiples ratios.

“Valuations are also above those of peers from emerging markets. While industrials have benefited from strong manufacturing prowess, we expect staples to see a time correction,” BNP Paribas said.