Morgan Stanley expects India to be one of the best performing emerging markets in 2025. The New York-headquartered investment bank sees 18% upside for the BSE Sensex by the December end, it said in a note on Jan. 3.
India’s macro stability is strong due to improving terms of trade and flexible inflation target. The brokerage forecasts earning of 18–20% earning growth over the next four to five years. Private capital expenditure cycle, re-leveraging of corporate balance sheets and unfolding of a structural rise in discretionary consumption are among reasons for this. A reliable source of domestic risk capital also contributes to the capital expenditure. “These factors have reduced India’s beta to EM to 0.4, explaining the rich headline multiple,” Morgan Stanley said.
Of the policy priorities of India, getting the primary deficit to zero seems to be at the top, and the upcoming budget will likely reconfirm this, according to the brokerage. Infrastructure spending, restructuring GST rates, direct tax reforms, more free trade agreements, and focus on energy transition are other areas that will contribute to India’s macro stability.
As far as interest rates are concerned, Morgan Stanley expects a shallow cycle of 50 basis points with the rate cuts starting from February. It expects two consecutive rate cuts of 25 bps each.
The Reserve Bank of India is now committed to durable liquidity. Regulatory tightening may loosen in the weeks ahead, according to the brokerage.
Initial issuance in the Indian markets are running at about 1.3% of GDP versus the previous peak of over 3.5% and set to rise further, Morgan Stanley said in a note.
India’s correlation of returns with global equities continues to fall. It’s also lower than historical levels. India’s returns are still hinged to the world. Policy action in China, US, and outcome of the ongoing conflicts in the world among other things could have an impact on how Indian earnings and stocks behave, it said.
Sees 18% Upside To BSE Sensex By December
In base case for the BSE Sensex, Morgan Stanley expects 18% upside by December-end. The base case is formed based on continuation in India’s gains, macro stability via fiscal consolidation, increased private investment, and positive gap between real growth and rates. The brokerage’s base case is 15% ahead of the consensus estimate.
The base case estimate also entails robust domestic growth, no recession in the US and benign oil prices. “We use a modest reduction in interest rates and positive liquidity environment as the base case for monetary policy. We do not anticipate a bunching of issuances, and the retail bid keeps its nose ahead of the supply,” Morgan Stanley said.
Earnings may compound at 17.3% annually through financial year 2027, it expects.
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