A Year of Consolidation and Optimism

The Indian economy has been navigating through an intriguing landscape of mixed signals. Following a strong rebound post-pandemic, growth momentum took a hit in the second quarter of FY25, with GDP expanding at a 7-quarter low of 5.4%. This marked the third consecutive quarter of slowing growth, undershooting expectations and raising concerns about sustainability. However, early indicators from Q3 paint a brighter picture, suggesting the possibility of recovery and optimism for the future.

A Glimmer of Hope in Q3

Rural consumption continues to be a bright spot, supported by favorable monsoons and a resurgence in agricultural activities. This has driven demand for two-wheelers and fuel consumption in November, while urban consumption, although slow earlier, is showing signs of recovery. Government capital expenditure is expected to accelerate in the latter half of FY25, potentially offsetting the muted spending seen during the election-affected first half.

Private capital expenditure remains uneven, with sectors like renewable energy gaining momentum while traditional sectors lag. Nevertheless, key indicators like steel consumption and employment growth in organized manufacturing suggest that the private sector is slowly regaining its footing.

The external sector remains a challenge, with contracting merchandise exports and a widening trade deficit. However, the domestic economy’s resilience, coupled with policy interventions, could help mitigate these pressures. Preliminary estimates suggest Q3 GDP growth could rebound to 6.8%, bolstering confidence in economic fundamentals.

Infrastructure and Manufacturing: Engines of Growth in 2025

Looking ahead to 2025, infrastructure and manufacturing are expected to lead the charge in driving economic growth. The government’s focus on fiscal consolidation is likely to balance spending with growth-oriented initiatives, particularly in infrastructure development. Recent project announcements in defense and transportation signal renewed activity in these sectors.

The manufacturing sector, buoyed by global supply chain diversification and favorable domestic conditions, is poised for expansion. Factors such as India’s demographic advantage, cost-effective labor, and regulatory support provide a solid foundation for growth. Additionally, the rising adoption of technology and digitalization in manufacturing processes is expected to enhance productivity and competitiveness.

Opportunities for the Real Estate Sector

The real estate sector stands to benefit from better affordability, declining interest rates, and low inventory levels. High demand for residential and commercial properties, coupled with regulatory reforms, is likely to drive significant growth.

Stock Markets: A Year of Consolidation

Indian equities, having faced volatility in 2024, are positioned for a period of consolidation in 2025. The anticipated interest rate cuts by the Reserve Bank of India (RBI) in early 2025 could provide a much-needed boost to corporate earnings and valuations. The correction in the Nifty 50 index, bringing its P/E ratio closer to long-term averages, further enhances the attractiveness of Indian equities.

Domestic flows are expected to remain robust, supported by the financialization of savings and strong participation in mutual funds. Foreign institutional investments, which faced outflows in the latter half of 2024, are likely to return as valuations stabilize and growth prospects improve.

The Road Ahead

While 2025 is expected to be a year of consolidation, the underlying macroeconomic backdrop remains strong. Infrastructure development, manufacturing growth, and a recovering rural economy are set to be the key drivers of economic resilience. As the global landscape stabilizes and policy-driven measures take effect, the Indian economy and equity markets are poised to navigate the challenges and capitalize on emerging opportunities.

Investors should watch for policy actions, particularly in the areas of interest rates and government spending, as these will play a pivotal role in shaping the trajectory of the economy and markets in the coming year.

Market this week

Source: BSE and NSE

• After the sharpest weekly fall in over two years during the previous week, Indian markets staged a recovery, closing with a 1% gain.
• The recovery was supported by robust Domestic Institutional Investor (DII) buying, despite continued Foreign Institutional Investor (FII) selling and mixed global cues.
• Nifty Auto and Pharma indices led the gains, each rising over 2%.
• Nifty FMCG added 1.5%, while Nifty Bank and Realty indices gained 1% each.
• Nifty Media was the weakest performer, shedding nearly 2%, followed by Nifty Metal, which declined 1%.
• FIIs continued to offload equities, with net sales of ₹6,322.88 crore during the week.
• DIIs stepped in as strong buyers, providing net inflows of ₹10,927.73 crore, supporting the market recovery.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

• ACME Solar’s shares closed 1% higher at ₹239 on December 26 after announcing ₹1,988 crore financing from Power Finance Corporation (PFC) for a 300 MW solar-wind hybrid renewable energy project. The project combines solar power in Bikaner, Rajasthan, and wind energy in Bhuj, Gujarat. Backed by a power purchase agreement (PPA) with NTPC, the project has secured grid connectivity and land acquisition for its solar component. Operations are expected to commence by June 2025.
• IndusInd Bank’s shares rose on December 27 after announcing plans to sell ₹1,573 crore worth of non-performing microfinance loans, involving 10.6 lakh retail accounts. The bank will auction the NPAs via a public bidding process, setting a reserve price of ₹85 crore, approximately 5% of the total principal. Bidders must submit cash-based proposals by December 30.
• UltraTech Cement announced an ₹851 crore acquisition of an 8.69% stake in Star Cement at up to ₹235 per share. The transaction, approved on December 27, represents a strategic minority investment. Following a large trade of 3.36 crore shares worth ₹766 crore in Star Cement, its stock surged over 7% to ₹247.30 in early trade.