Daily Voice: Star Health's Aneesh Srivastava expects FY25 GDP growth at 6.5%, private capex to remain subdued in H2FY25

While rural consumption has experienced a continued slowdown over the past four years, we did see some recovery in Q2 of FY23. However, the recovery was not sustained due to factors like inadequate fiscal spending in rural areas and a contraction in farm exports. That said, the most recent quarter has shown some positive signs, with rural consumption growing by 2.6 percent. This rebound can largely be attributed to the favourable monsoon conditions this year. However, it's important to note that a sustainable recovery in the rural economy will still take time and will be subject to further economic developments and policy interventions.

Is it the right time to add exposure to staples over discretionary in the current environment?

At this stage, it may be premature to increase exposure to staples. From a long-term perspective, discretionary sectors continue to be a better play in India, driven by growth in per capita income and rising disposable incomes. These trends may be sustained over time, especially as consumer behaviour shifts towards higher spending on discretionary goods. Therefore, while staples might have short-term appeal, discretionary sectors should remain a core focus for future growth.

Do you expect economic growth to fall below 7 percent for FY25?

The global economic backdrop is quiet challenging, with weaker demand across many regions. We also anticipate trade protectionism and potential tariff wars, which could prove inflationary and keep interest rates higher for longer. Additionally, the strength of the USD, persistent FII outflows and higher inflation in India will limit the Reserve Bank of India’s ability to cut rates in the near term. As a result, we project India’s GDP growth for FY25 to be around 6.5 percent, which is closer to the country's long-term potential growth rate.

Do you expect the Indian rupee to fall to 85-86 against the dollar?

India’s Real Effective Exchange Rate (REER) is currently close to 107.21, which suggests that the rupee is fairly valued. However, with expected export slowdowns, continued FII outflows, and a strong USD driven by US-centric growth, the rupee may face downward pressure. Additionally, the US-China tariff imposition could lead to a weaker RMB (Chinese yuan), prompting other emerging markets, including India, to adopt competitive devaluation strategies. Therefore, we estimate the fair value of the Indian rupee to be around 85.5 against the US dollar.

Do you think it will be difficult for private capex to pick up in the second half of FY25?

There has been a noticeable slowdown in the growth of Gross Fixed Capital Formation over the last two quarters, with the growth rate dropping to 7-9 percent compared to 12-15 percent last year. Additionally, India’s manufacturing capacity utilization stands at around 74 percent. In an environment of 6.5 percent real growth, higher interest rates, and overall uncertainty, we expect private sector capital expenditure growth to remain subdued in the second half of FY25. This cautious outlook is likely to continue unless there is a significant change in the economic landscape.

Do you believe PSU stocks hold great value, but it is not a buy unless there is a strong pickup in government spending in H2FY25?

PSU stocks represent a diversified basket, and while their valuation re-rating has largely been realized, the outlook for these stocks will depend on which businesses show higher revenue growth and improving Return on Equity (ROE). If these factors are not present, investors might find better opportunities elsewhere. While some PSU stocks could still offer value, the key for any significant uptick in their performance will be a marked improvement in government spending, especially in the second half of FY25.

Is the worst over for the equity markets after the recent correction?

We are witnessing a slowdown in earnings growth for Nifty companies, with growth now in the mid-single digits. Furthermore, the broader market valuation remains relatively high at 22.3 times. Given these factors, we expect some degree of correction in market valuations. Considering both domestic growth dynamics and the challenging global economic environment, it is likely that we will continue to see either price or time correction in the equity markets in the near future.

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