Recent improvements in domestic macroeconomic data suggest the worst may be behind us and the triggers for a gradual improvement in corporate earnings are beginning to fall in place, said Elara Capital. Now the biggest shift in the domestic economic condition has been the decisive and proactive shift in the RBI’s approach toward banking system liquidity and pickup in government spending. “In the past 10 years, episodes of surplus liquidity conditions see listed non-financial firms recording 390bp higher earnings growth than episodes of deficit liquidity with a three-quarter lag on YoY basis. Globally, softness in the US dollar and crude oil prices provides necessary tailwinds amid elevated trade and geopolitical uncertainty. Most importantly, after the swift weakness in the INR, the currency seems to be gradually aligning closer to its fair value. We price in another 2.0-2.5 per cent depreciation from the current levels in the next 3-6 months,” said Garima Kapoor, Economist and Executive Vice President, Elara Capital.
Amid this backdrop, Elara has maintained a positive outlook on domestic cyclicals, including NBFCs, private banks, and discretionary consumption sectors. The brokerage firm is seeing strong potential in industries where market consolidation is increasing, such as aviation and telecom, as well as those with robust pricing power, like the hotel sector. Additionally, Elara Capital favors large, diversified infrastructure firms and select defense companies, particularly component manufacturers, which stand to benefit from the European Union’s expanding defense budget.
RBI’s stance on liquidity and rates
The Reserve Bank of India (RBI) has already bought Indian government bonds (IGB) worth Rs 2.6 trillion, including a planned auction on 25 March of Rs 500 billion with Rs 2.3 trillion bought in the past 45 days. Additionally, two USD-INR swaps worth around Rs 1.3 trillion have been conducted with another approximately Rs 880 billion (USD 10 billion) being scheduled. “We expect the RBI’s Monetary Policy Committee (MPC) to dial up its accommodative bias and retain focus on keeping liquidity intact. We expect a 75bp rate cut in FY26E by the MPC with a likelihood of another 25bp in FY27E as headline inflation moderate and inflation impulses remain soft. This should aid in lending with a lag and support growth & earnings,” stated Elara Capital.
Move away from bias towards strong fiscal consolidation
The Centre’s pivot to debt-GDP ratio from FY27 will limit the rate of headline fiscal consolidation even as efforts to reduce debt remain intact. “Our analysis until FY40 suggests headline fiscal deficit as a percentage to GDP ratio will decline by a mere 100bp even as debt-GDP of the Central government falls to 45.6 per cent in FY40E from 55.7 per cent of GDP currently,” said Garima Kapoor. The impending Pay Commission order awards in FY27 and robust transfer payments from States to women (Rs 1.68 trillion, 0.5 per cent of FY25 GDP) suggest that the pace of government spending is improving.
Government spending
Another big positive development, Elara Capital said, has been the consistent uptick in government spending both at the Centre and State level after prolonged sluggishness throughout H1FY25, following the General and State elections.
Total spending of the Centre and 20 large States under consideration picked up from -1.4 per cent YoY during April-June FY25 to 8.3 per cent during April-January FY25, with capital expenditure swinging from a contraction of 31 per cent during April-June FY25 to 1.5 per cent during April-January FY25. “Further, our analysis of cash balance of the GOI with the RBI suggests spending momentum has sustained in February and March 2025 too,” Garima Kapoor added.
Softening USD and crude oil prices add to tailwinds
“In line with our call in our January 2025 year ahead outlook, the USD has weakened, owing to softer US economic data and rising uncertainty. CYTD until 17 March, the DXY Index is down by ~4.7 per cent while the MSCI EMFX Index is up ~2 per cent, with the INR experiencing ~1.1 per cent rebound from the record lows in the first week of February 2025. In the upcoming months, conditions for softer USD remain intact as we expect US growth to moderate, owing to spillover impact of trade uncertainty and consumers pulling back on spending due to an uncertain income outlook,” stated the analysis report by Elara Capital.
Also, the Federal Reserve is likely to stay on the rate cut path in CY25 (we price in 50bp cut) as indicated in the latest Fed meet, which can put further downside pressure on the USD. Separately, elevated inflation and strong wage growth outlook in Japan is likely to keep BoJ hawkish, keeping the downside pressure on USD intact. Likewise, higher spending outlook in the EU driven by Germany is lifting prospects of economic recovery and thereby the EUR.
Oil on the path of continued softness
The International Energy Agency (IEA) is expecting a potential oversupply in the range of 600,000 950,000/bbl in CY25, which could grow if OPEC+ unwinds cuts. “While the demand outlook may continue to pick up pace, owing to the China stimulus, diverted sea freight routes, and increased air travel demand, rising supply from April 2025 and liquified natural gas (LNG) supply glut is likely to keep crude oil range bound,” Elara Capital said while maintaining that this is likely to aid in lowering import bill for India as was evident in the February 2025 data where the oil import bill dropped by ~30 per cent YoY as India’s crude basket prices declined by 5.2 per cent YoY.