Fiscal lapse, weak growth outlook in Budget may trigger further market selloff, says Deepak Ramaraju of Shriram AMC | Stock Market News

Expert view: Deepak Ramaraju, Senior Fund Manager at Shriram AMC, believes a populist budget may strain the fiscal deficit and result in further rupee weakness. This will lead to lower rate cuts and delays in economic growth. Moreover, any miss on fiscal prudence or lower growth guidance may trigger a further selloff in the Indian stock market. In an interview with Mint, Ramaraju discussed factors behind the recent market fall, valuations and sectors he is positive about.

Edited excerpts:

What are your expectations from Budget 2025 from the market’s perspective?

The slump in GDP growth in Q2FY25 to a seven-quarter low of 5.4 per is worrying. Hence, the government is expected to focus on measures to boost growth through economic support for the lower strata of the population.

Investments in infrastructure development, sustainable energy, a boost for manufacturing, and sustained spending on defence and railways can support economic growth and boost demand for SMEs.

Spending on social sectors such as healthcare and housing, implementation of a direct tax code and simplification of the tax structure, along with higher savings in the hands of the people, can trigger higher consumption, especially at the bottom of the pyramid.

Can a neutral or populist Budget trigger further selloff in the market?

From the market perspective, the continuation of spending and fiscal prudence will be closely monitored.

The guidance for GDP growth of 6.5 per cent can be taken positively by the market, and a growth-oriented budget is the need of the hour. Hence, we may expect the government to be cautious about populist measures.

A populist budget may strain the fiscal deficit and result in further weakness in the rupee, leading to lower rate cuts and delays in economic growth.

Any miss on the fiscal prudence or lower growth guidance may trigger further selloff in the markets.

What are the key concerns that are driving the market down? When do you expect the market to stabilise?

The Nifty 50 index has corrected more than 12 per cent from its all-time high level of 26,277.35 reached in September 2024. The correction has been steeper in January 2025.

The key concerns that impacted the markets in India are:

1. Rising US bond yields: The US bond yields have been rising on the expectation of fewer rate cuts by the US Fed in the calendar year 2025. The US Fed’s decision of fewer rate cuts is linked to sticky inflation, a strong labour market resulting in stronger consumer demand, and an expectation of higher tariffs from the newly elected government.

2. Stronger US dollar: The higher tariffs could potentially ratify the trade surplus of selected countries with the US, and hence, the USD (US dollar) is trading relatively stronger than INR (Indian rupee) and other emerging market currencies.

3. Earnings disappointment: The Q2FY25 earnings season underperformed market expectations, and Q3 FY25 is also expected to be muted. The slowdown in earnings is mainly attributed to sticky inflation and economic slowdown.

4. Economic slowdown: The overall economic activity in India has entered a slower patch, resulting in lower urban demand and struggling rural recovery. These are partly attributed to slower government spending in the current fiscal.

5. Valuations: Indian equities were trading more than two times the standard deviation from a valuation perspective based on the last five-year average. This has led to a steeper correction in Indian equities.

6. FII outflows: A stronger USD and rising bond yields make the return from Indian equities less attractive. Hence, we are seeing continuous FII outflows from India. The outflows cumulatively have crossed over ₹2.25 lakh crore since October 2024.

Given the dynamic nature of the factors impacting the yields and currency, it is hard to pinpoint a specific timeline for recovery.

However, easing inflation to 3.3 per cent in December should arrest a significant fall in the US treasuries and the equities globally.

A deterioration in labour market conditions or further easing inflation would force the US Fed to be more accommodating to the monetary policy and potentially reverse the current trend.

Any abatement of fears of tariffs would be a welcome move for the US yields and the currency perspective.

Has the recent correction eased concerns of stretched valuations?

The recent correction in Indian equity markets across all market caps has provided marginal relief concerning valuation.

This Nifty 50’s PE (trailing basis) has corrected to 21 times from the peak of 24 times in September. However, the valuation may be expensive in the broader markets.

The midcaps and small-cap P/E have corrected to 40 times and 32 times, respectively, from the peak of 44 times and 36 times.

Some of the stocks, especially in cyclical sectors such as infrastructure, defence, PSU and railways, have seen a correction of more than 20 per cent to 30 per cent from the peak.

The disappointing Q2FY25 earnings, hopes are pinned on earnings of the third quarter, which are expected to be mixed. If the earnings in Q3FY25 further disappoint, we may expect more correction in equities.

How do you see India’s macro picture evolving? Should we be cautious?

One may expect the inflation to bottom out in the medium term; a couple of rate cuts are on the cards, and the government is expected to continue to invest in infrastructure, boost manufacturing and focus on sustainable energy. 

The new direct tax code, if approved by the parliament, may improve consumption and boost savings. The domestic flows and the retail participation in the markets may increase. 

Overall, all these measures may lead to a resurgence in growth, and we may expect the earnings to show improvement, leading the markets to remain buoyant unless a global event or geopolitical factor may disrupt the growth or impact inflation significantly.

What should be our strategy for mid and small-caps?

Valuation for many of the mid and small-cap stocks seems to be expensive. One has to be bottom-up stock-specific with good growth prospects and strong financial performance backed by strong management and trading at a reasonable valuation. 

The overall allocation to mid and small-caps may be tricky compared to CY2024. Any improvement in the current macro conditions may result in outperformance to large caps. 

On the contrary, these segments may be more vulnerable to correction if further deterioration in economic activity is cited. It would be ideal to remain neutral and keep increasing the allocation every fall, provided further correction sets in.

Which sectors are you positive about at this juncture?

Sectors such as IT, banking, EMS (electronic manufacturing services), manufacturing, renewable energy, defence, railways, healthcare, and consumption-oriented industries may be positive for 2025. 

Higher disposable income due to implementing a direct tax code or simplifying tax structure can result in higher discretionary spending in automotive, durable goods, travel and leisure. 

A tax cut in the US or higher discretionary spending on IT can boost better deals for IT companies in India. However, AI can be a game changer within the industry.

Government spending or support in the form of PLI or tax incentives can help with manufacturing, EMS, defence, railways, and renewable energy space. 

Some of the stocks have corrected in the recent market meltdown and can be potential opportunities for investments. 

Banks may witness recovery post interest rate cuts, resulting in a possible pick up in credit growth. Moreover, the recent CRR cut by 50 bps (in two tranches) should boost liquidity and credit growth in the banking sector. 

The valuation discount in some of the counters may be a potential opportunity. 

The healthcare sector may sustain the momentum if there are no fresh restrictions from regulators in the USA. 

Domestic demand for pharma may be sustained based on increased government support for healthcare. Hence, the sector may continue to outperform the broader benchmark.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.