India in multi-year bull-market cycle, says Morgan Stanley's Ridham Desai
While the Indian economy is resilient enough to weather the ongoing tariff storm kicked up by the US, Desai remains watchful of the next round of negotiations for a bilateral trade agreement between the two countries and the ensuing second order impact of the US actions on Indian corporate confidence and capex cycle, which he believes are more relevant than the import duties themselves.
Edited excerpts:
What is impact that the 25% tariff and penalty on Indian goods' exports to the US can have on the country's economy and markets?
In FY25, India's exports to the US were at $86.5 billion, while its trade surplus with the US was $40.8 billion (1% of GDP). Within sectors, India's exports of electrical machinery are the highest at $15.9 billion, followed by pearls and other precious and semi-precious stones at $10 billion FY25. In terms of share of India's exports to the US, textiles make up close to half of the exports, while the share of pharma products is ~40%.
That said, energy, automobiles/auto parts and pharma are excluded from the announcement made on July 30. Again, the talks are still on, and the final tariffs are likely to be different and probably lower.
Read more: Indian markets stare at short-term jitters from Trump's tariff hit
At an aggregate level, India's goods exports to the US are 2.2% of GDP. This implies a less severe direct impact of tariff-related developments, notwithstanding the relative disadvantage vis-a-vis other nations. Further, nuances will emerge at the sector-level on the basis of the tariff differential with other economies and exposure to the US.
We remain watchful of the developments from the next round of negotiations and the second-order impact of the tariffs (through weaker corporate confidence and deferred capex cycle), which in our view is likely to be more relevant than the tariff itself.
Profits of broader markets grew in single digits for eight straight quarters, as of March end. This slowdown doesn't seem to worry you. Why?
Now, our terms of trade have changed. We need less oil and there is something that the world needs from us, which is our people and our services. And therefore the CAD (current account deficit), our saving deficit, is reducing. Last year, it was down to 0.6% of GDP and it's likely to remain like that. Therefore, we need less funding from the world, and thus have decoupled from the global capital market cycles.
Compare this with 10-20 years ago, when we were highly coupled to the world; highly coupled to global capital market cycles because we had a big saving imbalance, and therefore, we needed to continue to rely on global capital flows. So whenever global capital flows shrank, which is what happened during US recessions, we got hit. If you plot the BSE Sensex correlation with US recessions, you get a very tight correlation, even though we did not have a very large share of global trade.
The reason why we were so tightly correlated was because of our balance sheet, and dependence for capital flows, not because of dependence on global trade. This has also changed profit structures in India, because now we are losing less profits to the rest of the world. Our profits are currently at about 5% of GDP. Our previous peak, which was hit in 2010, was 7%. And I think we will easily go past 7% due to these structural shifts, and therefore there is a lot more room for earnings growth.
Imagine a nominal GDP growth of 10-11% and profits gaining share in GDP; so profit growth will likely be higher than GDP and this cycle may have another 3-5 years to go before it peaks out. Eventually, it does peak out because investments become excessive, bad decisions start being taken and things start tapering out, like they did in 2010. But we are still not there yet, and are a few years away.
But can't the relative slowdown in government capex hurt earnings, especially if private capex doesn't fill the gap?
In February last year, the government took a decision that the time had come to lift the foot off the fiscal pedal—we did a lot of heavy-lifting during covid, now we got to hand the mantle back to the private sector. So one has to compress the fiscal deficit to prepare for the next crisis when it comes. You cannot be going into any crisis with an elevated deficit because you will not have any room to act. And so, the government announced a massive compression of 110 basis points in capex, which by July, when the final budget came, became 120 basis points.
Read more: Vijay L Bhambwani's Ticker: Bulls are running out of time
This should have simultaneously been accompanied with monetary easing, but that only came a little later. By the time you came to September 2024, the annualized fiscal deficit was not running at 4.9%, but at 3.4% because the first quarter was lost in elections and in the second quarter, heavy rains disrupted government activity. So, government capex was running way below what was budgeted. Such a deficit compression cannot come without a cost to growth and that is exactly what happened. That is now behind us. Government spending recovered very nicely after October, and with a lag that has come through in earnings. Last quarter earnings were better than expected, and this quarter's earnings will also be quite okay. So that soft spot is behind us.
On rate cuts—is there room for more, given the recent frontloading by the Reserve Bank of India (RBI)?
The RBI very appropriately started a big rate cut cycle, and now it must decide where real rates need to be. If you look at the current messaging from the RBI, it shows India needs to run 150 to 200 basis points of real rates. The real rate is what keeps your saving in line with the requirement rate of investments for a certain growth target.
Given the secular shift in India's terms of trade that now allows it to run a narrower current account deficit, I think the RBI can lower real rates. This means if inflation is under control, nominal interest rates can be much lower than in the past. And I think we are about to enter such a cycle.
No country out of the top 25 is anywhere close to the 10-11% nominal growth that India enjoys--China is struggling to get to 5% and will probably end up at 4% because of deflation. The global growth is struggling to get past 3%. So, when you think about equities, the numerator has strong growth with less volatility and the denominator, which is your discount rate, is declining due to likely lower interest rates. If interest rates are falling, and your growth is intact, equity valuations go up. At 20 times, the market is cheap, and this will go much higher before it moderates.
So lower real rates, thanks to lower inflation, will spur household balance sheets' shift to equity?
Why do you buy bonds in India? Ten years out, the bond yield for a 10-year bond, will yield 6.2%. Earnings growth in India of 11-12% means the equity yield 10 years out is sitting at 14-15%. Why would one buy bonds?
India is not a market where growth is exhausted, so the small gap in the equity and the bond yield makes equities attractive. It's no wonder that households in India are buying stocks. They are damn smart. It explains why households are making this shift to their balance sheet… people think this bid (investment in equities) is behind the rising stock prices. No. Stock prices are rising because the fundamentals are good, and the bid is coming because of that. It's the other way around… It is because share prices are rising that the bid is coming. Because households can see they need to alter their balance sheets, which are severely underexposed to equities.
Read more: Why does a stronger US dollar spell trouble for Indian equities?
In 2015, something quite historic happened in India. For the first time, retirement funds—which are provident funds and the National Pension System—were allowed to buy stocks. Until then, these two entities were not allowed to buy stocks, and the Modi government changed that. This is very similar to what happened in the US in 1980. In 1980, for the first time, 401k plans were allowed to buy stocks and that was Reagan's decision, and what happened in the next 20 years is that US households piled up stocks. Every month, retirement funds would buy shares to lift their allocation and households came in. Essentially, you got the NASDAQ bubble by the end of 1990s.
A very similar thing will happen in India, with one difference, which is when we arrived in the present millennium, the baby boomers in the US started retiring and drawing down on their savings and the net flows turned negative. In India, that's not happening for the next 30/40/50 years. We are still going to be adding to the workforce on a net basis. So, this bid is going to sustain.
The second difference is the starting point of exposure. Our starting point of exposure is 3%. Today 7% of household savings is in equities. The US is right now at 40%, Europe is at 50%, even Japan which is a conservative society has 20%+ in equities, and it has gone through a 30-year bear market.
India is at 7%; this number will easily go past 20%. Anybody out there who is saying the households are going to run away, they just don't understand what is happening. They are not going anywhere.
This just sets you up for a very strong bull market, which of course will have corrections along the way, I mean, can we correct 20%? Of course, we can. Markets can correct any time. Just imagine how much this market has digested in the last six months.
It has taken in a meaningful slowdown, it has absorbed an India-Pakistan skirmish, it has absorbed an Iran-Israel war, it has absorbed a trade war. It has absorbed so much, and it is standing there like 6-7 odd per cent from all-time highs. So, I think the market wants to go up, not down, and there are fundamental reasons for it—growth is good, volatility is low, rates are falling, and as a consequence, households are shifting their balance sheet allocation.
In the trailing 12 months, households saved $800 billion. If they put 10% in equities, that is $80 billion, but they will not put in that much. They are not there yet because it is very difficult to move money at that size and scale, as a large part of corporate India is owned by the controlling stakeholders or promoters.
Despite these positive dynamics, why are foreign investors selling?
Even though we are a $5 trillion market, the free float is $2.5 trillion. Therefore, it is not like you have that size to absorb this, so that is why prices need to go up. I am just giving you the technical position.
Read more: Rupee slide, steep valuations drive FPIs to pull ₹32,311 crore from Indian stocks
Secondly, India is now 3.7% of world GDP – it is approximately 3.8 % of the world market cap. How much do foreigners own? 60 basis points. Free float adjusted, if they want to be neutral on India, they need to be at 1.9%. What is that bid? It is $1.8 trillion that they need to move to India. They are not able to do it because every morning at 9:15 am, the domestic investor is standing there to buy stocks; foreigners can't buy and there are only two cohorts in the market. Foreigners and domestic. If domestics have decided that they are coming every morning to buy, foreigners can't buy, they must sell.
They can only buy if promoters and corporates decide to sell and that is happening only in a small way. That is the only time foreigners are able to buy, when some corporate comes to sell, either primary or secondary.
Promoter selling of ₹70,000 crore this year is not worrisome?
In 2007-2008, new issuances in the market were running at about 3% or $30 billion of market cap at $1 trillion. Today, the equivalent number is $120-150 billion, which means I need INR 80,000 crores every month for 12 months before the pain will be felt.
I am not seeing that type of capital raising happening. And the reason is because corporate balance sheets are very light. Corporate debt-to-GDP in India is 50%, down from 62%. There is so much ability to borrow, but they are not borrowing. The first thing that corporates will do is borrow money, it's cheap. Why will you dilute? You will borrow money. The exits that we are seeing are largely PEs (private equity) and VCs (venture capital funds) who have to exit because they are running into cycles for their funds. There is very little primary that is happening, it's all secondary. The primary will happen in large scale when corporates have borrowed money. So the first thing you will get is a credit cycle, then you will get an issuance cycle.
Is the credit cycle not taking off because of capacity utilization not happening?
I think the structure of the economy has evolved and comparing this with the 2007/2010 cycle is not fair. In that cycle, we were still building steel, cement, and a lot of other things that were basic industrial stuff. That stuff is not needed in that large quantity; we've already built a fair bit of infrastructure. There is more work to be done but a lot of heavy-lifting in rail and roads has been done.
The other thing that people don't appreciate so much is that India's productivity has gone up. And my guess, it's up 10% over the last 15 years. If productivity is up 10%, it means you need 10% less capital to generate the same unit of output. So, our capex cycle is not going to 39% of GDP, as it was in 2010. It is probably going to peak at 35-36%, and we have another 3.5-4% to go before this capex cycle peaks.
I think people who are looking for that largescale capex will be slightly disappointed. It is not going to be at that scale as we saw then. But yes, credit growth will pick up, and in fact what I think will happen is that a large portion of that pickup will happen on household balance sheets. Household debt to GDP is still very shallow, so there is room for it to rise, and there is a culture shift that has happened.
What is borrowing money? It is essentially spending your future income. The US has already done that. China has already done it; China is sitting at 320% debt-to-GDP. Europe has done it. India will do it next.
So, the next 20-30 years, is going to be a secular rise in household debt-to-GDP, and we are going to spend our future. But by spending your future, what you do effectively is raise your current growth rate. You will have to give it up later, but that story is perhaps three or four decades away. So, it's still too early because our starting point is low.
I won't be surprised if we have a multi-year credit growth cycle, led by households, and then supplemented by corporates because when households demand so much, capacity creation will happen.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Hindustan Times
12 minutes ago
- Hindustan Times
Sanjaya Baru interview: We've turned emigration of talented Indians into an aspiration
A record number of wealthy Indians are leaving the country. According to a recent report by Kotak Bank, one in five UHNIs is either in the process of migrating abroad or has plans to do so. Over 23,000 millionaires have left the country in the last decade, says Sanjaya Baru. In his latest book, Secession of the Successful: The Flight out of New India, the veteran journalist and policy commentator records the various phases of organised migration out of the country and examines the reasons behind the current exodus. Also read | Review: Sanjaya Baru's book does a favour to history, Congress Sanjaya Baru, an economist and political analyst, has written extensively on India's economic transformation and development. His recent book is Secession of the Successful: The Flight Out of New India. For the elite, the pull of the first-world life, especially in Dubai or Singapore, is too strong, says Baru. 'Why wait for 2047 to live in a developed economy if you can do so today?' he says. In this interview, Baru talks about how the exodus has been normalised, the political and economic factors driving it, and what it means for a country that hopes to be a developed economy by 2047. You argue in your book that India's elite aren't just leaving physically, they are slowly pulling away from the idea of India itself. So, would you call this book a warning, a lament, or a diagnosis? It's certainly not a lament. It is a warning. It's a diagnosis to begin with. The brain drain, or the export of human capital, drew attention 40 to 50 years ago when economists like Jagdish Bhagwati wrote about it. But in the last quarter century, no one is paying attention. We have normalised the emigration of talented Indians, to the point where the government actually takes pride in promoting it. So yes, it's a warning: that you're allowing more and more of your talented people to leave, and doing nothing to retain them. And it's a diagnosis, because I look at the different manifestations of emigration. You've described the secession as a flight from responsibility. The rich are also leaving Brazil, South Africa and Turkey. So, why should we be expecting something different from the elite in India? I don't expect anything different. This is not peculiarly Indian, nor is it new. If other countries don't pay attention, that's their headache. But as an Indian concerned about the economy, I worry that more and more talented Indians are leaving. You've written about the government facilitating emigration. Other countries try to curb it. Is this official encouragement a policy mistake? It is a mistake, but a recent one. Labour migration involves talent too, but given our large pool of unemployed workers, I don't worry about it as much. Highly qualified Indians leaving is something a poor, low-income, developing country like ours should worry about. Countries like China, Taiwan, or Korea had large-scale emigration 30 to 40 years ago, but now have return migration because they've become developed economies. We are not at that stage. We cannot prevent emigration. Proposals like Bhagwati's 'brain drain' tax in the 1980s were dismissed as impractical, but why should we encourage it? For example, the foreign minister recently launched the 'Global Access for Talented Indians' initiative. Why should the government get involved in sending people out? We are a capital-deficit economy — and by capital I mean not just finance, but also human capital. Our record in research, science, and advanced fields is poor for a country of our size. What role have political changes played, especially since 2014? The numbers show an increase in the emigration of wealthy and elite Indians over the last decade. There's an economic reason and a political reason. Economically, more Indians can now afford to buy citizenship overseas, property overseas, educate their children abroad, and live abroad. Politically, there is fear — of the taxman, the Enforcement Directorate, and harassment by the bureaucracy. Last year Prime Minister Narendra Modi promised an 'ease of living mission', but nothing was heard after that. Day-to-day life has become more of a headache: constant KYC forms, compliance demands. That's driving some people out. At diaspora events, overseas Indians cheer the Prime Minister and shout 'Bharat Mata ki Jai' and yet they don't return. Is this performative? It is performative, but more than that, it's the politicisation of the diaspora to serve domestic political needs. Every prime minister since 1947 has met overseas Indians; what's new is using these audiences to influence the domestic political process. This risks diplomatic consequences. A Singaporean diplomat once asked me if politicisation of overseas Indians could hurt bilateral relations. Tensions among Sikhs, Khalistanis, and Hindu groups in Canada, the UK, and the US show that the diaspora can become a source of political and law-and-order problems. And yes, there is hypocrisy. If you're so proud of Bharat Mata and this leadership, why don't you come back and help build the country? Post-independence, some of India's best minds went abroad but returned. That isn't happening now. Why? In Jawaharlal Nehru's time, many high-profile Indians returned — Homi Bhabha, Vikram Sarabhai, others — sometimes at his personal request. Conditions in India were modest, but they still came back. In recent decades, very few have returned. Even those who did, like Raghuram Rajan, stayed only briefly. The trend of permanent high-profile return ended in the 1980s. Can India still turn its diaspora into a national asset, as other countries have? Yes, the opportunity hasn't passed. But it depends on leadership that can inspire people the way Nehru did. Today, 22,000 Indians are professors in the US. If even 2% came to teach here, it would make a difference. Some universities like ISB, Ashoka, and Jindal have attracted talent, but not in large numbers. Have we made emigration too aspirational, then? Exactly. We're not ringing alarm bells; we've internalised it. As (economist) Devesh Kapur once noted, most of our elite — across business, politics, diplomacy, bureaucracy, the armed forces, academia — have children who want to emigrate. It's a loss of both human and financial capital. Last year, for the first time, outward FDI exceeded inward FDI. In a labour-surplus, capital-deficit economy, we should be retaining both finance and human capital. But we're not even trying.
Time of India
15 minutes ago
- Time of India
From Paytm to Eternal: 42 stocks where India's top performing PMS fund managers are betting on
India's sharpest money managers are placing bold bets on the market's most exciting new-age darlings and forgotten gems. The country's top 10 performing Portfolio Management Services (PMS) scheme in July made concentrated plays on everything from fintech unicorns to healthcare disruptors and speciality chemicals, shows data from PMS Bazaar. Here's where the smart money is flowing. InCred Asset Management - Healthcare Portfolio: Leading the Pack with 11.96% Returns The month's standout performer, InCred's Healthcare Portfolio, is doubling down on India's medical revolution with a 19.81% allocation to Healthcare Global Enterprises, the country's largest cancer care network. The fund's conviction play extends to diagnostics powerhouse Thyrocare Technologies (17.35%) and emerging player Krsnaa Diagnostics (11.62%). The healthcare-focused strategy also holds Jubilant Pharmova (10.04%) and RPG Life Sciences (6.81%), positioning itself to capitalise on India's growing healthcare infrastructure and rising medical tourism. Also Read | 7 multibagger stocks that FIIs are hoarding in 2025. Are you missing out? Valcreate's Digital Disruption Strategy: Betting Big on Fintech Giants Valcreate Investment Managers' IME Digital Disruption fund (up 6.34%) is making audacious bets on India's digital economy transformation. The fund has loaded up 22% in Eternal, followed by massive positions in fintech heavyweight One 97 Communications - Paytm (19.30%) and insurance aggregator PB Fintech (19.20%). The digital thesis extends to FSN E-Commerce Ventures - Nykaa (11.40%) and food delivery giant Swiggy (7.10%), capturing the entire new-age commerce ecosystem that's reshaping Indian consumer behaviour. Valcreate's Lifesciences Portfolio: Riding the Agrochemicals Wave Another Valcreate strategy making waves is their Lifesciences and Specialty Opportunities fund (8.48% returns), which has positioned itself as the go-to agrochemicals play. Leading the charge is Sharda Cropchem , with a commanding 15.85% weight, backed by pharma giant Divi's Laboratories (9.33%). The fund's agrochemical conviction deepens with Sumitomo Chemical India (8.08%), Dhanuka Agritech (7.49%), and Rallis India (7.31%), betting on India's agricultural modernisation and crop protection needs. Green Portfolio's MNC Advantage: Industrial Excellence Focus Green Portfolio's MNC Advantage fund (6.89% returns) is zeroing in on India's industrial backbone through multinational subsidiaries. KSB leads the portfolio at 12.68%, followed by engineering specialist Integra Engineering India (10.21%) and auto components player Federal-Mogul Goetze (9.42%). The strategy includes John Cockerill India (6.16%) and premium engineering brand Bosch (5.56%), capitalising on India's manufacturing renaissance and infrastructure buildout. Emkay's Pearls Strategy: Diversified Mid-Cap Play Emkay Investment Managers' Pearls fund (4.20% returns) mirrors the digital disruption theme with Eternal as its top holding (16.30%), while maintaining pharmaceutical exposure through Divi's Laboratories (9.70%). The fund balances growth with stability through Nesco (8.80%), Federal Bank (7.10%), and auto ancillary Sundram Fasteners (7.10%). Ambit's Micro Marvels: Small-Cap Specialisation Ambit Investment Advisors' Micro Marvels Portfolio (4.27% returns) is hunting for tomorrow's champions in India's small-cap universe. The fund spreads its bets across Rajratan Global Wire (7.00%), staffing services leader Teamlease Services (6.50%), and industrial plays Menon Bearings, Entero Healthcare Solutions, and Thejo Engineering (6.00% each). Wryght Research Factor Fund: Contrarian Fintech Bet The Factor Fund from Wryght Research (2.69% returns) demonstrates conviction in fintech recovery with One 97 Communications as its largest holding (7.73%). The fund diversifies across Hitachi Energy India (5.68%), Maharashtra Scooters (5.38%), fertiliser player Paradeep Phosphates (5.19%), and financial conglomerate Bajaj Holdings & Investment (4.91%). Valcreate's Growing India: Chemical Sector Concentration The Growing India fund (2.84% returns) maintains Valcreate's chemical sector thesis with Divi's Laboratories leading at 7.65%, supported by Sharda Cropchem (7.48%) and Rallis India (6.54%). The fund also holds Swaraj Engines (6.32%) and Sumitomo Chemical India (5.82%). Shade Capital Value Fund: Value Hunting Across Caps Shade Capital's Value Fund (2.87% returns) is pursuing deep value opportunities across industrial names like Kilburn Engineering (4.33%), TD Power Systems (4.15%), and wealth manager Nuvama Wealth Management (3.94%). The fund also holds infrastructure play Transrail Lighting (3.71%) and building materials company Interarch Building Products (3.36%). Brightseeds Xylem Maverick: Cash-Heavy Cautious Approach The most conservative among the top performers, Brightseeds' Xylem Maverick Strategy (2.55% returns) holds a massive 47.29% in Zerodha Nifty 1D Rate Liquid ETF & Cash, suggesting a defensive stance. When invested, the fund focuses on agrochemicals through Dharmaj Crop Guard (8.56%), Sudarshan Chemical Industries (7.00%), renewable energy via Borosil Renewables (6.37%), and steel tubes specialist Scoda Tubes (5.49%). Also Read | Share prices rise after you sell? Data from 967 retail-sold stocks confirms your worst fear The positioning of India's top PMS performers reveals a clear trend: smart money is flowing into digital disruption stories, speciality chemicals, healthcare infrastructure, and industrial champions. With 42 distinct stock ideas ranging from established pharma giants to fintech unicorns, these fund managers are positioning for India's next growth phase while maintaining selective exposure across market caps and sectors. ( Disclaimer : Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Time of India
26 minutes ago
- Time of India
GST reforms: CII hails PM Modi's move; calls it a ‘visionary' step for businesses
Representative image The Confederation of Indian Industry (CII) has hailed the forthcoming reforms to the Goods and Services Tax (GST) announced by Prime Minister Narendra Modi during his Independence Day address from the Red Fort. Chandrajit Banerjee, director general of CII, said in a statement, 'On behalf of Indian industry, CII warmly welcomes the Hon'ble Prime Minister's visionary announcement of next-generation GST reforms. This landmark step reflects the Government's deep commitment to building a simpler, more transparent, and growth-oriented tax regime that will empower businesses and benefit consumers alike.' As per news agency ANI, the Prime Minister revealed that a high-powered committee will be set up to review and recommend comprehensive changes to the GST framework. CII called the move 'timely and forward-looking', noting it would help the tax system keep pace with India's fast-changing economy while ensuring stability for investors and entrepreneurs. The industry body welcomed several long-standing suggestions it had championed, including a shift towards a two-rate structure, alongside a separate rate for demerit goods, to simplify the system. CII also backed the correction of inverted duty structures in manufacturing, the reduction of compliance requirements for MSMEs, and the assurance of stable tax rates to boost investor confidence. Banerjee said these measures could significantly improve ease of doing business, cut costs, and speed up economic formalisation and digitisation. The proposed rationalisation of rates, lowering taxes on essential items and adjusting higher rates for luxury and sin goods, was described as a 'balanced approach of equity and efficiency' that would benefit both consumers and government revenue. Since its launch, GST has unified India's market, reduced tax cascading, and created a technology-driven compliance process. According to CII, the reforms mark the beginning of a 'GST 2.0' era, aligned with global standards and supportive of India's $5 trillion economy target. According to ANI, government sources stated that the Centre is considering removing the 12% and 28% GST slabs, retaining only the 5% and 18% rates. Around 99% of items in the 12% category could move to 5%, and nearly 90% of goods in the 28% slab may shift to 18%. CII praised the inclusive approach of the government and pledged to work with the finance ministry, GST Council, and stakeholders for smooth implementation. 'These measures will strengthen India's economic foundations, enhance investor confidence, and position the country among the world's most competitive and resilient economies,' Banerjee concluded. Stay informed with the latest business news, updates on bank holidays , public holidays , current gold rate and silver price .
