Strategy : Emkay Strategy Midweek Masala By Emkay Global Financial Services Ltd
Macro update – Liquidity surge continues
We remain constructive on Indian equities and see the current run sustaining. In our monthly macro update, we highlight the surge in domestic liquidity, which has driven a bull steepening of the yield curve. In the short term, this should help lenders, especially NBFCs with fixed-rate books and banks with weak deposit franchises. We do note, however, that concurrent consumption indicators remain weak and our OW on Consumer Discretionary is based on a forward-looking view.
Theme of the week – Macro update
We see a few green shoots in Consumption/Growth supported by tractor sales, Non-Oil Non-Gold imports, and the RBI Consumer Confidence Index. However, broad-based recovery is still to be seen, as major concurrent indicators like Loan Growth, Passenger Vehicle sales, and Credit card transactions continue to be weak. With RBI aggressively easing, we expect lending activity to pick up from next quarter on, followed by a consequent rise in consumption.
External measures have subsided. Pressure on the Rupee and FX reserves has notably diminished, with stability returning aided by FPI flows. The DXY correction of ~10% from its peak is meaningful, now below 100 after 100 days of Trump’s tumultuous tenure. Tariff risks appear largely priced in, with the path ahead skewed toward constructive trade negotiations broadly favorable for India.
The liquidity surge continues
The RBI announced a fresh OMO of Rs1.25trn, potentially pushing domestic liquidity to over 1% (of NDTL). The RBI’s massive easing push has led to a bull-steepening of India’s yield curve, and the tenor spread (10Y over 3M) has expanded to 40bps YTD from 10bps. Short-term yields below 3Y maturity have fallen by 65-75bps, slightly ahead of the 50bps repo rate cut. This is expected to have a significant impact on borrowing costs (the RBI is not done yet, we believe) and reinforces our thesis of a consumption revival in 2HFY25.
Singapore marketing takeaways
Majority of the clients concurred with our positive view on India. The RBI easing puts India in a more favorable cyclical position, especially as worries around a deep recession in the US abate. This is also resulting in India seeing disproportionate flows vs other emerging markets. Our sectoral calls faced push-back, though. Financials remains the favored sector, though our low-growth argument resonated with some specialists. SMID private banks are seeing interest, to play easy liquidity and the MFI turnaround. Our OW position on technology found few takers, while staples remains out of most investors’ radar. Cement was another favored sector. Finally, autos and discretionary, our top OW, had a mixed response: some investors are bottom-fishing while others are waiting for more concrete evidence of a demand revival.
Interesting read of the week – US exceptionalism to stay
Nouriel Roubini is surprisingly optimistic in his Bloomberg interview, he emphasizes how the ongoing AI revolution reinforces the persistence of American exceptionalism, positioning US growth to accelerate from the current 2% to approximately 4% by decadeend – of which AI will contribute 200bps. Roubini expects the US economy to avoid a material recession over the near-to-medium term. Systemic risk to the dollar reserve currency status remains negligible. A capex boom is under way, led not only by the ‘Magnificent Seven’ but increasingly due to non-tech sectors scaling AI deployment, suggesting that investment as a share of GDP will rise sustainably. The US will maintain its leadership, with China a second, while global adoption of AI technology accelerates. Unlike past industrial revolutions characterized by logarithmic growth, the AI era promises exponential expansion, with the US advantaged by unparalleled scale and network effects.
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