Daily Voice: Trump policies pose limited risk to India, says Bajaj Allianz Life CIO

India is relatively better positioned due to three key factors: 1) the strong and cordial relationship between the world's two largest democracies, 2) relatively lower trade interaction between India and the US, and 3) a lower trade deficit of the US with India. Therefore, we believe that the overall impact of these policy decisions on India would be lower and should be manageable in the long run.

Do you think the equity market is becoming more cautious due to Trump's moves, even though the budget and hopes of a rate cut have provided enough support?

Equity markets dislike volatility, and currently, we are experiencing higher volatility due to tariff-related news. The recent changes in personal income tax announced in the budget, along with the interest rate cut by the RBI last week, should support consumption and have a positive impact on the markets. However, there has been some disappointment with the level of capital expenditure allocated in the budget.

Overall, we believe that the outlook for equities has slightly improved in recent months, with signs of demand recovery and some moderation in valuations. Regarding the tariff news, we suggest ignoring the noise and headlines and focusing on the actual actions being taken.

Do you think interest rate policy should focus more on domestic macros than on forex now?

This has been the case, ever since the introduction of Flexible Inflation Targeting, RBI’s interest rate policy has been driven by the mandate to maintain price stability while supporting growth. This view has got reinforced with RBI cutting the repo rate on 7 February 2025 by 0.25% to 6.25%, as India’s CPI inflation is expected to moderate (to 4.2% in FY26) in order to support growth.

Further, the RBI Governor clarified that as part of RBI’s exchange rate policy, the focus was on smoothening volatility rather than targeting any specific exchange rate level. We feel that this is a prudent macro-economic policy, considering that Indian Rupee’s overvaluation has been correcting over the last few weeks.

Do you see the RBI MPC cutting interest rates by 25 bps in April meeting too, after February meeting?

We believe that the rate cut cycle will be shallow of 50bps based on the current economic landscape, with the next 25bps likely to be delivered either in April’25 or June’25 monetary policy meeting. MPC had indicated that the future rate cuts will be based on a fresh assessment of the macroeconomic outlook hence RBI will be data dependent in upcoming MPC meetings.

Do you believe that 6.8% growth for FY26 is achievable, especially after the budget?

While a GDP growth of 6.8% is the upper band of GDP projection of 6.3%-6.8% given by Economic Survey, RBI projects India’s GDP growth for FY26 at 6.7%. The announcement of fiscal impulse by way of direct tax cuts of ~ Rs 1 trillion is expected to spur consumption which of late had softened, especially in urban areas.

Additionally, RBI’s move to cut repo rate by 0.25% will provide additional fillip to the economy by way of lower cost of funds. On the back of these measures, we believe this growth should be achievable subject to a good monsoon and absent any major external shocks to the economy.

Are you adding exposure to the consumer discretionary sector post-budget, as most experts expect saved taxes to boost the segment?

The recent changes in personal income tax rates announced in the budget are expected to increase disposable income for consumers. How individuals choose to spend this additional income will depend on their financial situation, but it's likely we'll see increased spending on discretionary items such as automobiles and durable goods.

Besides the boost in demand from the budget changes, the sector is also expected to benefit from the implementation of the Eighth Pay Commission, work on which has already started. Consequently, the demand outlook for the sector has improved in recent months. However, due to the relatively high valuations of most durable goods companies, we remain neutral on the sector for now.

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