UBS sees India’s GDP growth moderating in FY25 amid weaker global growth, lower public capex

India’s GDP growth is expected to moderate to 7 per cent in 2024-25 from the estimated 7.6 per cent this fiscal even as the country will likely remain as one of the fastest growing economy in the world, the Swiss Wealth Management major UBS has said. 

For the fiscal year 2026-27, Indian economy is likely to grow at 6.8 per cent, it said in its latest India monthly outlook. The  moderation in GDP growth next fiscal will largely be due to weaker global growth coupled with local factors such as softness in public capex spend. 

“Sector wise, we expect some moderation in investment-led growth due to lower public capex, while see a gradual recovery in rural growth on expectations of a normal monsoon (as projected by IMD),” said the UBS note.

On current account deficit, UBS sees India’s current account deficit narrowing to 0.8 percent of GDP in FY24E on the back of an improving trade deficit. Heading into FY’25, it is expected to modestly increase to 1.3 percent of GDP on slowing global growth and supported domestic demand. “Overall we expect the current account deficit to remain well contained, thereby supporting the INR in our view,” the note said. ”We believe India offers the best structural growth story among other large economies”. 

Bullish equity outlook

UBS’ Wealth Management business sees Indian equities remaining in a sweet spot and has projected Nifty index to reach 25,200 by March 2025, implying an upside of 12 per cent. The Nifty target is based on March 2026 EPS estimates of ₹ 1,226 and a 12-month forward target PE multiple of 20.6X. 

Asserting that India’s high valuation is sustainable, the UBS note highlighted that it believes the premium valuation is justified by the cyclical and structural tailwinds, and further supported by political stability. 

Additionally, valuations get support from falling equity risk premium as interest rates fall, it added. 

It also noted that a key risk for Indian markets includes unfavourable election outcomes, a delay to the start of the rate cut cycle and geopolitical tensions in the Middle East (surge in oil prices).

Interest rate outlook

On the policy front, UBS noted that RBI may continue with its hawkish hold on rates as GDP growth remains strong and inflation remains above target with repeated food spikes posing upside risks. 

“The continuous repricing of Fed easing path could also weigh on the RBI’s decision to start its rate cut cycle. 

We believe RBI could act in the June quarter by shifting its stance to neutral followed by a cumulative 50 basis points rate cut in the second half of the year,” UBS note said. 

Although the RBI remains cautious, fiscal consolidation and bond-index-inclusion-related inflows will likely see bond yields fall over the coming months, it added. 

  • Also read:UBS raises India’s GDP forecast to 6.3% for FY24 with potential growth to 6-6.5%

“We expect the 10-year Indian government bond yield to decline to 6.25 per cent by March 2025. We believe it is a good time to add long-duration Indian government bonds and AAA corporate bonds,” UBS note said. 

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